■ 


THE    CURRENCY  PROBLEM 


AND    THE 


PRESENT  FINANCIAL  SITUATION 


A   SERIES    OF    ADDRESSES   DELIVERED   AT 
COLUMBIA   UNIVERSITY 

1907-1908 


THE   COLUMBIA   UNIVERSITY   PRESS 

1908 

All  rights  reserved 


THE   CURRENCY   PROBLEM 

AND   THE 

PRESENT   FINANCIAL  SITUATION 


THE   CURRENCY  PROBLEM 


AND    THE 


PRESENT  FINANCIAL  SITUATION 


A   SERIES   OF   ADDRESSES   DELIVERED   AT 
COLUMBIA   UNIVERSITY 

1907-1908 


THE   COLUMBIA   UNIVERSITY   PRESS 

1908 

All  rights  reserved 


COPYRIGHT,    1908, 

Bt  THE   COLUMBIA   UNIVERSITY   PEESS. 


Set  up  and  electrotyped.     Published  February,  1908. 


Nortoooti  ^ress 

J.  8.  Cushing  Co.  —  Berwick  &  Smith  Co. 

Norwood,  Mass.,  U.S.A. 


CONTENTS 


*AGE 


Introduction. — The  Crisis  of  1907  in  the  Light  of  History  .      vii 
Edwin  R.  A.  Seligman,    McVickar    Professor    of    Political 
Economy,  Columbia  University. 

The  Modern  Bank 1 

Frank  A.  Vanderlip,  Vice-President  of  the  National  City 
Bank. 

The  Stock  Exchange  and  the  Money  Market  ...       19 

Thomas  F.  Woodlock,    former   Editor   of  the   Wall   Street 
Journal. 

Government  Currency  vs.  Bank  Currency        ....      41 
A.  Barton  Hepburn,  President  of  the  Chase  National  Bank. 

Gold  Movements  and  Foreign  Exchanges         ....       61 
Albert  Strauss,  of  Messrs.  J.  &  W.  Seligman  &  Co. 

The  New  York  Clearing  House 89 

William  A.  Nash,  President  of  the  Corn  Exchange  Bank. 

Clearing  Houses  and  the  Currency 95 

James  G.  Cannon,  Vice-President  of  Fourth  National  Bank. 

American  and  European  Banking  Methods  and  Bank  Legis- 
lation Compared 119 

Paul  M.  Warburg,  of  Messrs.  Kuhn,  Loeb  &  Co. 

The  Modern  Corporation 153 

George  W.  Perkins,  of  Messrs.  J.  P.  Morgan  &  Co. 


2?5908 


INTRODUCTION 

The  Crisis  of  1907  in  the  Light  of  History 

BY 

EDWIN   R.    A.   SELIGMAN 


INTRODUCTION 

The  Crisis  of  1907  in  the  Light  of  History 

The  occasion  of  the  addresses  collected  in  this  volume 
was  a  desire  to  contribute  to  the  understanding  of  the 
crisis  of  1907,  and  to  lay  down  some  principles  which 
might  be  of  service  in  the  reconstruction  of  our  currency 
system.  The  first  question,  however,  that  will  obviously 
present  itself,  is  as  to  whether  the  crisis  of  1907  was 
primarily  a  financial  or  an  industrial  crisis ;  and  it  may  be 
well,  before  taking  up  the  specific  problems  raised  by  the 
addresses,  to  consider  this  question  a  little  more  closely. 

From  one  point  of  view,  indeed,  every  economic  crisis 
is  a  financial  crisis.  For  since  values  are  expressed  in 
terms  of  money,  and  since  the  modern  business  super- 
structure is  erected  on  the  basis  of  credit,  every  economic 
revulsion  expresses  itself  through  the  medium  of  a  change 
in  prices;  and  since  the  bank  is  the  center  of  credit 
operations,  every  crisis  inevitably  involves  a  revolution 
in  the  conditions  of  credit.  From  this  point  of  view,  all 
crises  may  be  declared  to  be  financial  crises. 

From  another  standpoint,  however,  a  distinction  may 
be  drawn  between  financial  crises  proper  and  commercial 
or  industrial  crises  in  the  larger  sense.  There  may  be 
a  financial  panic  or  crisis  due  primarily  to  temporary  and 
sudden  oscillations  in  the  condition  of  the  money  market 
or  in  the  price  of  securities.  Such  oscillations,  sharp  and 
sudden  though  they  be,  may  have  but  little  relation, 
whether  of  effect  or  of  cause,  to  the  general  commercial 
and  industrial  interests.  Of  this  character,  for  instance, 
were  the  original  Black  Friday  in  England,  in  1745,  and 


x  INTRODUCTION 

its  namesake,  the  famous  Black  Friday  in  1867  in  New 
York,  as  well  as  many  spasmodic  fluctuations  due  either 
to  political  rumors  like  that  which  followed  the  Vene- 
zuelan Message  of  1895,  or  to  temporary  speculative 
manipulations,  like  the  Northern  Pacific  "squeeze"  of 
1901.  Of  a  distinctly  different  nature  are  those  wider 
disturbances  which  are  traceable  to  more  general  economic 
causes  and  which,  even  though  they  culminate  in  acute 
financial  trouble,  are  followed  by  an  industrial  and  com- 
mercial depression  of  more  or  less  magnitude. 

Into  which  category  is  to  be  put  the  crisis  of  1907;  and 
if  in  the  latter,  what  were  its  causes  ? 

At  the  outset  it  must  be  remembered  that  crises  are 
essentially  modern  phenomena.  We  have  had  financial 
transactions,  and  that,  too,  on  a  large  scale,  for  many 
centuries  and  in  many  civilizations.  But  crises,  in  con- 
tradistinction to  temporary  panics,  have  existed  in  Eng- 
land only  since  the  middle  of  the  eighteenth,  and  in 
other  countries  only  since  the  beginning  of  the  nineteenth, 
century.  The  first  crisis  in  England,  barring  the  financial 
flurry  connected  with  the  South  Sea  Scheme  in  1720,  was 
that  of  1763,  followed  by  the  minor  disturbances  of  1772 
and  1783,  and  the  more  wide-spread  convulsions  of  1793, 
1810,  and  1825.  The  first  crisis  in  the  United  States 
was  that  of  1817 ;  and  it  was  not  until  1837  that  we  find 
the  first  international  crisis,  spreading  from  the  United 
States  to  England  and  then  to  France.  In  Germany  the 
period  of  important  crises  was  ushered  in  even  later. 

Crises,  in  other  words,  are  products  of  modern  economic 
life.  Modern  economic  life,  however,  has  as  its  basal 
characteristic  industrial  capitalism,  with  the  factory  sys- 
tem and  the  newer  methods  of  production  for  a  wide 
market.  This  transition  to  modern  industrial  capitalism 
began  in  England  in  the  latter  half  of  the  eighteenth 
century,  was  initiated  in  America  in  the  first  two  decades 


THE   CRISIS   OF    1907  xi 

of  the  nineteenth  century,  and  took  place  on  the  Conti- 
nent at  a  later  date,  last  of  all  in  Germany.  The  explana- 
tion of  crises  must  therefore  be  sought  in  some  feature 
of  our  modern  capitalistic  life. 

The  current  explanations  may  be  divided  into  two 
categories.  Of  these  the  first  includes  what  might  be 
termed  the  superficial  theories.  Thus  it  is  commonly 
stated  that  the  outbreak  of  a  crisis  is  due  to  lack  of  con- 
fidence, —  as  if  the  lack  of  confidence  was  not  in  itself 
the  very  thing  which  needs  to  be  explained.  Of  still 
slighter  value  is  the  attempt  to  associate  a  crisis  with  some 
particular  governmental  policy,  or  with  some  action  of 
a  country's  executive.  Such  puerile  interpretations  have 
commonly  been  confined  to  countries  like  the  United 
States,  where  the  political  passions  of  a  democracy  have 
had  the  fullest  sway.  Thus  the  crisis  of  1893  was  ascribed 
by  the  Republicans  to  the  impending  Democratic  tariff 
of  1894 ;  and  the  crisis  of  1907  has  by  some  been  termed 
the  "Roosevelt  panic,"  utterly  oblivious  of  the  fact  that 
from  the  time  of  President  Jackson,  who  was  held  re- 
sponsible for  the  troubles  of  1837,  every  successive  crisis 
has  had  its  presidential  scapegoat,  and  has  been  followed 
by  a  political  revulsion.  The  crisis  of  1857  helped  to 
weaken  the  Democrats;  the  crisis  of  1873  resulted  in  a 
popular  majority  for  Tilden;  the  crisis  of  1884  put 
Cleveland  into  the  presidential  chair;  and  the  crisis  of 
1893,  with  the  ensuing  depression,  brought  the  Republi- 
cans back  to  power. 

Opposed  to  these  popular,  but  wholly  unfounded, 
interpretations  is  the  second  class  of  explanations,  which 
seek  to  burrow  beneath  the  surface  and  to  discover  the 
more  occult  and  fundamental  causes  of  the  periodicity 
of  crises.  Here  we  find  an  interesting  and  progressive 
series  of  attempts  to  grapple  with  the  difficulties  of  the 
problem.     For  a  long  time  economists  and  business  men 


xii  INTRODUCTION 

advanced  the  theory  of  overproduction,  forgetful  of  the 
fact  that  there  really  cannot  be  any  such  phenomenon 
as  too  much  actual  production  of  wealth.  With  the  dis- 
appearance of  this  doctrine  there  came  into  prominence 
its  variant,  which  put  the  emphasis  on  relative,  rather  than 
absolute,  or  universal  overproduction,  that  is,  the  over- 
production of  some  things  and  the  underproduction  of 
others.  This  theory  also  failed  to  command  general 
assent,  for  the  reason  that  no  one  could  show  in  what 
respects  there  was  any  underproduction  of  wealth,  or 
any  lack  of  particular  products  during  the  years  preceding 
a  crisis.  Others,  again,  have  sought  the  causal  fact  in 
underconsumption,  alleging  that  the  larger  consumption 
of  wealth  will  in  itself  take  up  all  the  slack  of  produc- 
tion, and  thus  obviate  a  crisis.  This  explanation  also  is 
inadequate,  because  it  overlooks  the  fact  that  the  real 
falling  off  in  consumption  comes  after  the  crisis  has 
developed  and  not  before :  in  fact,  the  period  of  pros- 
perity which  precedes  a  crisis  is  generally  marked  by  a 
prodigious  increase  of  consumption. 

The  socialists,  again,  seek  to  explain  crises  by  the  exist- 
ence of  private  property  in  the  means  of  production, 
and  contend  that  if  we  were  to  cease  the  exploitation  of 
the  laborer  by  the  modern  capitalistic  method,  crises 
would  disappear.  While,  however,  agreeing  in  this 
general  conclusion,  they  differ  in  their  detailed  analyses. 
Thus  Rodbertus  maintains  that  the  secret  of  crises  is  to 
be  found  in  the  fact  that  the  progress  of  industry  causes  a 
continually  greater  output  of  product,  while  the  exclusion 
of  the  laboring  classes  from  any  participation  in  this 
increased  productivity  involves  a  relative  diminution  in 
demand,  and  thus  ultimately  a  fall  in  price,  culminating 
in  a  crisis.  Marx,  on  the  other  hand,  puts  the  emphasis 
on  the  fact  that  the  necessary  fall  in  the  rate  of  profits 
(which,  according  to  him,  is  a  result  of  the  surplus  value, 


THE   CRISIS   OF    1907  xiii 

or  exploitation  theory)  is  incompatible  with  the  greatly 
increased  productivity  of  fixed  capital  inherent  in  the 
present  system,  and  that  the  clashing  of  these  two  incon- 
gruous tendencies  of  modern  industrial  life  brings  about 
a  relative  overproduction  of  capital,  and  gives  rise  to 
periodical  explosions.  This  view,  finally,  is  sharply 
criticized  by  the  latest  and  ablest  of  the  socialist  theorists, 
Tugan-Baranowsky,  who  in  turn  maintains  that  crises 
are  due  primarily  to  the  fact  that  under  the  modern 
system  it  is  impossible  to  invest  the  fresh  accumulations 
of  capital  proportionally  in  all  branches  of  industry, 
and  that  it  is  this  relative  disproportion  of  accumulated 
capital  to  the  particular  demand  that  causes  the  anarchy 
of  the  market  and  the  recurrent  convulsions  of  industry. 

While  the  socialist  scholars  have  undoubtedly  made 
valuable  contributions  to  the  discussion  of  the  problem, 
they,  like  the  earlier  economists,  have  erred  in  laying 
stress  on  the  question  of  technical  production  rather 
than,  as  is  done  by  the  more  recent  economic  thinkers, 
on  that  of  business  enterprise  and  capitalization.  This 
is  manifestly  not  the  place  to  elaborate  a  general  theory 
of  crises.  If  we  attempt,  however,  to  give  the  bare 
outline  of  the  modern  explanation,  it  would  be  approxi- 
mately as  follows. 

The  problem  of  crises  or  industrial  depressions  is  one 
of  relative  capitalization.  Under  the  present  system  of 
enterprise,  production  is  carried  on  in  mass  for  a  prospec- 
tive market,  rather  than  as  formerly  in  small  quantities 
to  fill  a  definite  order.  Even  if  it  be  contended  that 
certain  factories  nowadays  are  busy  with  producing  to 
order,  it  is  none  the  less  true  that  numerous  plants  are 
continually  being  erected  in  the  expectation  that  orders 
will  be  received  in  the  future.  The  good  times,  or  periods 
of  rising  prices,  may  be  due  to  many  causes  —  either  in 
general  to  an  augmented  gold  output,  or  in  particular 


xiv  INTRODUCTION 

to  the  increase  in  the  demand  for  some  special  product, 
whether  in  the  iron  industry  through  a  new  navy  pro- 
gram, or  in  the  clothing  industry  through  the  outbreak 
of  a  war,  or  in  any  other  industry  through  a  change  of 
fashion  or  what  not.  Prices  first  rise  in  the  particular 
enterprise,  production  augments,  the  movement  spreads 
to  other  lines  of  business,  and  the  new  enterprises  are 
financed  by  loans  from  the  banks  or  trust  companies,  or 
by  the  sale  of  securities  on  a  capitalization  proportionate 
to  the  anticipated  earnings.  In  times  of  buoyancy  we 
are  continually  capitalizing  anticipated  earnings  and 
future  hopes,  and  we  do  this  through  the  utilization  of 
credit  on  a  large  scale.  We  build  railways,  put  millions 
into  steel  plants,  "boom"  land  sites,  and  form  combina- 
tions of  all  kinds,  employing  the  credit  facilities  granted 
by  the  banks,  or  throwing  the  securities  on  the  stock 
market.  We  "water"  the  stock  or,  if  that  be  forbidden 
by  law,  we  drive  the  market  quotations  to  a  high  point, 
because  we  think  that  this  is  warranted  by  prospective 
earnings.  Sometimes  we  say  that  we  capitalize  the 
good  will  or,  in  the  case  of  quasi-public  enterprises,  the 
franchise ;  but  in  all  cases  we  capitalize  the  future,  because 
we  believe  that  we  shall  earn  an  income  which  will 
justify  this  capitalization. 

The  peculiarity,  however,  of  an  up-grade  movement 
which  rests  on  modern  credit  facilities  is  that  we  wear 
magnifying  glasses  or  look  at  the  future  in  too  roseate 
a  light.  It  is  a  natural  tendency  of  human  nature  to 
capitalize  one's  hopes  and  expectations  too  liberally. 
If  this  is  done  on  a  continually  larger  scale,  the  capitali- 
zation becomes  so  great  that  actual  earnings  do  not  come 
up  to  our  anticipations  or  the  fear  of  a  discrepancy 
between  actual  and  estimated  earnings  begins  to  obsess 
us.  It  becomes  necessary  to  reduce  the  capitalization 
to   its   true  dimensions,   i.e.   to   a  sum   proportioned   to 


THE    CRISIS   OF    1907  xv 

actual  earnings.  This  process  of  readjustment  of  over- 
capitalized values  obviously  involves  loss;  but  readjust- 
ment there  must  be.  If  the  realization  of  its  necessity 
is  sudden,  we  have  a  crisis  or  panic.  In  the  height  of 
the  period  of  exaltation  or  prosperity,  something  happens 
to  disturb  confidence.  A  chance  occurrence,  a  mere 
rumor,  may  suffice.  Some  bank  considers  its  credit  too 
heavily  engaged,  or  suspects  the  adequacy  of  the  collateral. 
Just  at  the  flood  of  the  tide,  when  new  demands  are 
constantly  being  made,  it  finds  itself  unable  or  unwilling 
to  respond.  Its  refusal  starts  or  intensifies  the  feeling 
of  insecurity,  and  with  the  inability  of  some  important 
concern  to  meet  its  obligations,  a  failure  occurs  and  the 
crisis  is  precipitated.  If ,  on  the  other  hand,  the  situation 
is  well  handled,  and  if  the  readjustment  of  the  over- 
capitalized values  to  actual  earning  capacity  can  be 
brought  about  more  gradually,  we  have,  in  lieu  of  a  crisis, 
a  liquidation  and  a  period  of  depression  which  lasts 
until  the  up-grade  movement  again  sets  in. 

Crises,  therefore,  are  not  necessarily  the  result  of 
increased  technical  production.  The  important  point 
is  not  production,  but  capitalization.  There  may  be 
overcapitalization,  without  overproduction.  Overpro- 
duction of  particular  things  may  indeed  accompany 
overcapitalization,  but  the  stress  must  be  laid,  not  on  the 
relation  between  production  and  consumption,  as  the 
older  writers  assumed,  but  on  the  discrepancy  between 
the  investment  and  its  returns. 

While  the  general  features  of  a  crisis  are  thus  every- 
where the  same,  the  details  differ  in  each  case.  Some- 
times it  is  the  banks  that  fail  first,  sometimes  the  general 
business  enterprises.  Sometimes  it  is  the  railway  securi- 
ties that  first  feel  the  strain,  at  other  times  "the  indus- 
trials," and  at  still  other  times  the  raw  materials.  Some- 
times the  bolt  comes  out  of  the  clear  sky  with  prices 


xvi  INTRODUCTION 

at  a  maximum,  sometimes  it  is  only  the  last  stage  of  a 
period  of  liquidation  with  progressively  lower  prices. 
But  however  unpredictable  and  seemingly  inscrutable 
the  actual  course  of  events,  the  fundamental  explanation 
is  always  the  necessary  readjustment  of  capitalization 
to  actual  earning  capacity. 

That  this  is  true  of  all  our  crises  can  be  seen  from  a 
hasty  review.  The  crisis  of  1817  was  the  result  of  the 
first  utilization  of  modern  capitalist  methods  in  America. 
The  period  of  the  War  of  1812  was  marked  by  three  facts : 
first,  the  industrial  revolution  in  New  England  and  the 
introduction  of  the  factory  system  in  the  textile  industry ; 
second,  the  great  development  of  internal  improvements 
through  canal  and  turnpike  companies ;  third,  the  sudden 
multiplication  of  banks  to  finance  the  new  enterprises. 
The  consequence  was  the  so-called  "Golden  Age,"  which 
lasted  for  several  years,  until  checked  by  the  immense 
imports  from  England  after  the  war,  and  destroyed  by 
the  collapse  of  the  overcapitalized  undertakings.  It  was 
well  into  the  twenties  before  the  country  recovered  from 
the  industrial  depression,  and  then  came  the  second 
up-grade  movement,  which  culminated  in  1837.  This 
was  primarily  a  land  and  transportation,  rather  than  a 
purely  industrial,  phenomenon.  The  canals  and  turn- 
pikes in  the  East  were  now  being  replaced  by  railways, 
and  the  spread  of  slavery  caused  a  rush  of  cotton  planters, 
not  only  to  the  black  belt,  but  to  the  pine  barrens  and 
hill  country  of  the  South.  It  was  primarily  land  values 
that  were  being  overcapitalized,  and  the  process  went  on 
to  such  an  extent  that  the  annual  land  revenues  of  the 
government  now  exceeded  the  total  governmental  receipts 
from  all  sources  of  a  few  years  before.  Finally,  to  finance 
this  land  movement  there  were  called  into  being  hundreds 
of  the  "coon-box"  banks,  who  found  a  champion  in 
President  Jackson  in  his  war  against  the  Bank  of  the 


THE    CRISIS   OF    1907  xvii 

United  States.  As  the  period  of  exaltation  had  been 
unexampled,  so  the  collapse  was  proportionately  great. 
The  crisis  of  1837,  followed  as  it  was  by  those  of  1839 
and  1841,  was  still  more  serious  than  that  of  1817. 

It  was  again  well-nigh  a  decade  before  the  readjustment 
of  values  had  been  completed.  The  following  decade 
was  in  turn  marked  by  five  striking  facts :  first,  the  gold 
discoveries  of  California  and  Australia,  which  soon  in- 
itiated a  general  rise  of  prices;  second,  the  consumma- 
tion of  the  revolution  in  the  media  of  transportation  by 
land  and  water,  and  the  settlement  of  the  entire  Missis- 
sippi Valley,  the  most  fertile  portion  of  the  continent; 
third,  the  abolition  of  the  corn  laws  in  England  and  the 
opening  up  of  a  market  for  our  incipient  surplus  of  wheat ; 
fourth,  the  era  of  industrial  invention  which  resulted  in 
the  application  of  capitalistic  methods  to  new  classes 
of  enterprise  beside  the  old  textile  industries ;  and  fifth, 
the  development  of  free  banking  with  the  "wild-cat" 
institutions  to  provide  the  credit  facilities  for  this  pro- 
digious overcapitalization.  The  crisis  of  1857,  which 
was  the  inevitable  result,  was  perhaps  still  more  acute 
than  its  predecessors.  The  continuance  of  its  depressing 
influence  on  industry,  however,  was  checked  by  the 
economic  effects  of  the  Civil  War,  which  gave  an  artificial 
stimulus  to  many  forms  of  enterprise. 

In  the  period  immediately  succeeding  the  war,  great 
changes  again  occurred.  The  transcontinental  roads 
were  completed  and  the  Eastern  trunk  lines  consolidated ; 
the  great  wheat  fields  of  the  country  were  opened  up  under 
the  new  homestead  laws,  and  the  period  of  large  exports 
began;  the  Bessemer  process  revolutionized  the  iron 
industry,  and  the  factory  system  was  now  applied  to 
boots,  sewing-machines,  and  agricultural  implements; 
the  great  copper  and  silver  deposits  were  developed,  and 
the  petroleum  output  grew  apace;    while  the  greenbacks 


xviii  INTRODUCTION 

and  the  greenback  movement  fomented  the  process  of 
inflation.  The  discrepancy  between  the  capitalization 
and  the  actual  earning  capacity  of  the  country's  business 
enterprises  again  became  so  overwhelming  that  the 
necessary  readjustment  took  the  form  of  the  convulsion 
of  1873 — a  convulsion  the  depressing  effects  of  which 
were  felt  with  almost  increasing  severity  for  six  years. 

The  crises  of  1884  and  1893  were  both  less  intensive 
and  more  short-lived  than  their  predecessors,  for  reasons 
which  it  is  now  not  difficult  to  explain.  The  resumption 
of  specie  payment  in  1879  was  rendered  possible,  and 
was  followed,  by  a  series  of  abundant  crops  which  re- 
vivified enterprise,  and  which  were  aided  by  the  use  of 
agricultural  machinery  on  a  large  scale.  The  energy 
and  the  capital  of  the  nation,  however,  were  devoted  in 
increasing  measure  to  the  transportation  industry.  This 
resulted  in  a  perfect  orgy  of  new  railroad  construction, 
the  entire  mileage  of  the  country  increasing  in  five  years 
by  fifty  per  cent.  As  the  overcapitalization  was  primarily 
a  railway  overcapitalization,  the  resulting  reaction  of 
1884  was  essentially  a  railway  crisis,  leading  to  but 
indirect  and  temporary  disturbances  in  industry  at  large. 
Within  a  year  or  two  recovery  was  general,  and  the 
prosperous  years  from  1886  onward  were  reflected  in 
the  existence  of  a  huge  surplus  of  governmental  revenues. 
The  live-stock  and  meat-packing  business  attained  its 
high-water  mark;  the  textile  industries  made  great 
progress  in  the  finer  grades,  and  the  ready-made  clothing 
industry  assumed  vast  dimensions;  the  iron  and  steel 
industry  was  revolutionized  anew  by  the  invention  of 
the  open-hearth  process  and  the  utilization  of  cheap  ore 
from  the  Lake  Superior  region;  the  South  was  being 
quickly  developed  by  the  Northern  capital  that  poured 
into  the  cotton  mills  and  the  coal  and  iron  mines;  elec- 
tricity was  applied  to  industry  on  an  increasing  scale, 


THE    CRISIS   OF    1907  xix 

and  the  country  took  rapid  strides  in  its  evolution  from 
an  agricultural  to  an  industrial  community. 

The  movement  of  overcapitalization,  however,  was 
somewhat  checked  by  two  important  facts :  the  down- 
ward tilt  of  world  prices  in  general,  which  had  been 
falling  since  1873  and  which  were  fast  reaching  their 
lowest  point;  and  the  relative  shrinkage,  not  only  in  the 
amount  of  the  wheat  crop,  but  also  in  the  value  of  both 
the  wheat  and  the  cotton  crops.  The  resulting  reaction 
of  1893,  which  was  itself  partly  due  to  the  ill-timed  experi- 
ments with  silver  legislation,  was  as  a  consequence  neither 
so  profound  nor  so  long-continued,  since  the  discrepancy 
between  anticipated  and  actual  values  turned  out  not 
to  be  so  excessive. 

When  we  come  particularly  to  the  crisis  of  1907,  we 
find  that  the  general  causes  were  very  much  the  same. 
The  last  decade  has  been  characterized  by  the  most 
unexampled  prosperity  in  our  history.  The  most  striking 
initial  cause  is  the  prodigious  increase  in  the  gold  supply. 
Whereas  the  annual  average  value  of  the  output  of  gold 
was  under  one  hundred  millions  in  the  first  half  of  the 
eighties,  and  only  a  hundred  and  twelve  millions  in  the 
second  half,  it  has  grown  with  such  enormous  strides  that 
during  the  past  two  years  it  has  reached  an  annual  value 
of  about  four  hundred  millions.  The  result  has  been  a 
constant  rise  of  prices  from  the  minimum  level  of  1896. 
The  rapid  accumulation  of  gold,  much  of  which  went 
into  the  bank  reserves,  enabled  the  financial  institutions 
to  expand  their  credit  facilities  many  fold,  and  as  a  con- 
sequence enterprise  flourished  in  every  direction.  During 
the  last  decade  the  record  crops  of  cereals  and  cotton, 
the  extension  of  dry  farming,  the  effects  of  irrigation  on 
fruit  culture,  the  development  of  truck  farms,  and  the 
unparalleled  increase  of  immigration  led  to  a  remarkable 
enhancement  of  land  values  throughout  the  length  and 


xx  INTRODUCTION 

breadth  of  the  land;  the  output  of  coal  doubled,  that  of 
petroleum  more  than  doubled,  and  that  of  pig  iron,  as 
well  as  of  steel,  actually  trebled ;  the  huge  combinations 
of  capital,  now  spreading  to  every  form  of  enterprise, 
effected  prodigious  economies  and  revolutionized  business 
methods;  and  the  transition  from  the  agricultural  to 
the  industrial  phase  of  economic  development  proceeded 
with  unlooked-for  celerity.  Values  were  pushed  up  on 
all  sides  and  the  hopes  of  a  prosperous  community  were 
capitalized  with  a  recklessness  born  of  unbounded  faith. 
The  pace  was  too  rapid;  the  reaction  was  bound  to 
ensue.  In  the  late  autumn  of  1907  the  revulsion  was 
precipitated,  with  all  the  familiar  accompaniments  of 
an  acute  panic  such  as  the  collapse  of  several  financial 
institutions,  the  sudden  curtailment  of  loans,  leading  to 
the  failures  of  some  prominent  business  concerns,  the 
hoarding  of  money,  the  appearance  of  a  premium  on 
currency,  going  to  over  three  per  cent,  and  the  frantic 
efforts  of  the  financiers  to  relieve  the  situation  by  the 
importation  of  gold,  the  issue  of  clearing-house  certificates 
and  the  interference  of  government  through  the  dubious 
expedients  of  the  placing  of  a  new  bond  issue  and  the 
emission  of  Treasury  loan  certificates. 

The  crisis  of  1907,  however,  is  on  the  whole  not  com- 
parable either  to  that  of  1857  or  to  that  of  1873,  for 
reasons  which  have  thus  far  perhaps  not  been  adequately 
discussed.  These  reasons  may  be  classed  under  five 
heads. 

In  the  first  place,  the  very  magnitude  of  the  country's 
resources  has  been  a  favorable  factor.  The  unparalleled 
prosperity  of  the  past  decade  has  made  possible  the 
accumulation  of  a  vast  reserve  in  the  case,  not  only  of 
the  great  corporations,  but  also  of  the  average  business 
man.  This  reserve  has  acted  as  a  buffer  to  the  shock 
of  reaction,  and  has  softened  the  impact  through  a  speedy 


THE    CRISIS   OF    1907  xxi 

restoration  of  confidence  in  the  excellence  of  the  country's 
assets  and  in  the  real  solvency  of  business. 

Secondly,  the  crops,  while  not  those  of  a  bumper  year, 
have  been  large  and  valuable.  It  is  significant  that 
almost  each  of  our  great  crises  in  the  past  has  been  pre- 
ceded either  by  the  failure  of  the  harvest  at  home  or  by 
the  existence  of  such  a  bountiful  output  abroad  as  greatly 
to  reduce  prices.  It  must  be  remembered  that,  notwith- 
standing all  recent  developments,  this  country  is  still 
primarily  agricultural,  and  that  upon  the  varying  extent 
of  our  great  staple  crops  depends  in  large  measure  the 
effective  demand  which  sets  and  keeps  in  motion  the 
wheels  of  business  activity.  By  a  fortunate  coincidence, 
the  crisis  was  attended  by  a  phenomenon  which  in  ordi- 
nary times  would  have  spelled  prosperity,  and  which 
in  this  extraordinary  conjuncture  helped  to  bring  back 
normal  conditions. 

In  the  third  place,  the  overcapitalization  of  values  was 
somewhat  less  conspicuous  than  hitherto  in  our  greatest 
industry  — that  of  transportation.  Some  of  our  former 
crises  have,  as  we  know,  been  brought  on  primarily  by 
the  speculative  building  of  railroads.  But  whereas  in 
the  early  eighties  the  annual  increase  of  construction 
reached  ten  and  eleven  thousand  miles,  during  the  past 
five  years,  with  a  railway  system  three  times  as  large,  the 
annual  increment  of  new  construction  was  only  four  or 
five  thousand  miles.  The  consequence  has  been  that 
with  the  rapid  upbuilding  of  the  country  the  railways 
have  grown  up  to  their  capitalization,  until  it  is  now 
reasonably  certain  that  there  has  been  for  some  little 
time  scarcely  any  actual  overcapitalization.  A  striking 
proof  of  the  absence  of  any  real  discrepancy  between 
normal  values  and  the  capitalization  of  actual  earning 
capacity  is  afforded  by  the  congestion  of  traffic  of  a  year 
or  two  ago ;    and  even  with  only  normal  business  activity 


xxii  INTRODUCTION 

it  is  computed  that,  in  order  to  prevent  this  congestion  in 
future  and  to  maintain  the  railways  at  a  reasonable 
standard  of  efficiency,  there  will  be  required  an  annual 
investment  of  over  a  billion  dollars. 

Fourthly,  the  crisis  of  1907  was  preceded  by  a  period 
of  gradual  liquidation.  General  prices  of  commodities, 
with  a  few  notable  exceptions  like  that  of  copper,  were 
indeed  high  until  well-nigh  the  outbreak  of  the  panic. 
But  the  prices  of  securities  had  for  some  time  undergone 
a  marked  shrinkage.  Some,  quite  mistakenly,  attribute 
this  shrinkage  to  lack  of  confidence  engendered  by  the 
governmental  policy  toward  industry;  others,  with  equal 
readiness  and  no  less  extravagance,  ascribe  it  to  the  distress 
caused  by  the  exposures  of  the  methods  of  "high  finance" 
in  positions  of  trusteeship.  In  reality,  however,  the 
depreciation  in  securities  was  caused  chiefly  by  the  rise 
in  the  rate  of  interest.  In  fact  the  one  phenomenon  is 
really  the  other;  for  where  earnings  remain  unchanged, 
the  capitalization  of  the  earnings  depends  on  the  rate  of 
interest.  If  it  be  objected  that  the  price  of  stocks  fell 
because  of  the  apprehended  decrease  of  future  earnings, 
due  to  lack  of  confidence,  the  retort  is  obvious  that  this 
would  not  suffice  to  explain  the  equal  or  still  greater  fall 
in  the  capital  value  of  bonds,  private  or  public,  with  a 
fixed  rate  of  interest.  The  depreciation  was  not  national, 
but  international,  in  character;  and  it  applied  not  only 
to  our  railway  and  industrial  securities,  but  to  the  English 
"Consols"   as  well. 

The  rise  in  the  interest  rate,  which  explains  the  fall 
in  the  capital  value  of  securities,  was  due  to  several 
causes.  First  and  foremost  is  the  increase  in  the  gold 
output.  For,  as  is  now  well  established  by  economic 
theory  and  reinforced  by  the  observations  of  practical 
men,  while  any  increase  in  the  supply  of  loanable  funds 
on  the  call-money  market  temporarily  reduces  the  "money 


THE   CRISIS   OF   1907  xxiii 

rate,"  an  increase  in  the  general  supply  of  standard 
money  in  the  community,  on  the  contrary,  raises  not  only 
the  price  level  of  all  commodities,  but  the  price  for  the 
use  of  capital,  which  we  call  the  general  rate  of  interest. 
The  increase  of  money  as  the  standard  of  value  inevitably 
tends  to  increase  the  general  rate  of  interest.  Again, 
since  the  rate  of  interest  is  always  adjusted  to  the  earnings 
of  the  fund  of  capital  at  the  margin  of  its  employment, 
the  rate  of  interest  has  risen  because  there  has  been 
relatively  less  capital  available  for  employment.  The 
fund  of  free  capital  has  been  rapidly  diminishing  during 
the  past  few  years.  Hundreds  of  millions  were  destroyed 
in  the  Boer  and  Japanese  wars;  hundreds  of  millions 
more  disappeared  through  the  destruction  of  San  Fran- 
cisco and  Valparaiso;  and  countless  millions  in  addition 
have  been  utilized  to  finance  the  more  or  less  dubious 
schemes  which  have  sprung  up  in  all  countries  during  the 
years  of  prosperity.  Even  though  there  was  no  great 
overcapitalization  of  railroads  and  even  though  many 
of  the  industrial  enterprises  were  really  legitimate,  the 
discounting  of  the  future  was  not  quite  ample,  and  the 
capital  was  invested  more  rapidly  than  the  immediate 
returns  would  warrant.  The  replacement  fund,  in  other 
words,  was  neither  quite  large  enough  nor  quite  active 
enough ;  and  with  the  gradual  exhaustion  of  the  available 
free  capital,  interest  rates  necessarily  rose  and  security 
values  as  a  consequence  fell. 

The  period  of  liquidation  was  thus  a  fortunate  event. 
By  checking  the  movement  of  exaltation  and  preventing 
the  level  of  prices  from  being  so  extreme,  it  kept  the  reac- 
tion from  being  so  great.  Where  the  crest  of  the  wave  is 
lower,  the  shock  of  its  break  is  less.  Had  the  ascent  of 
prices  and  values  gone  on  unhindered,  the  convulsion  of 
1907  would  have  been  far  more  severe.  From  this  point 
of  view,  even  those  who  mistakenly  persist  in  ascribing 


xxiv  INTRODUCTION 

the  lack  of  confidence  to  the  President  ought  in  reality 
to  be  grateful  to  him;  for  to  the  extent  that  he  may  be 
said  to  have  superinduced  the  liquidation  of  the  spring 
and  summer,  he  assuredly  contributed  to  mitigate  the 
shock  of  the  inevitable  reaction  in  the  autumn. 

The  fifth  and  final  cause  of  the  lesser  magnitude  of  the 
crisis  is  the  development  of  trusts.  Until  we  attain  the 
right  perspective,  it  is  always  difficult  to  get  a  correct 
view  of  the  far-reaching  changes  which  are  taking  place 
under  our  very  eyes.  Especially  true  is  this  of  such  a 
veritable  revolution  as  is  typified  by  the  modern  con- 
centration and  integration  of  industry  into  the  vast 
combinations  known  as  trusts.  There  are  indeed  many 
disquieting  and  untoward  symptoms  in  the  development 
of  which  this  is  not  the  place  to  speak.  But  as  against 
the  undoubted  perils  of  what  we  are  all  now  coming  to 
recognize  as  an  inevitable  process,  we  sometimes  forget 
to  put  at  least  one  countervailing  advantage  which  is  of 
especial  importance  in  this  connection.  The  modern 
trust,  as  typified  in  its  most  developed  form  by  the  United 
States  Steel  Corporation,  is  apt  to  exert  an  undeniably 
steadying  influence  on  prices.  Precisely  because  of  the 
immense  interests  at  stake,  and  the  danger  of  a  reaction, 
the  trust  with  its  consummately  able  management  tends 
toward  conservatism.  As  compared  with  the  action  of 
a  horde  of  small  competitors  under  similar  conditions,  it 
is  apt  during  a  period  of  prosperity  to  refrain  from  mark- 
ing up  prices  to  the  top  notch,  and  is  likely  to  make  a 
more  adequate  provision  for  the  contingencies  of  the 
market.  With  this  greater  moderation  is  apt  to  be  asso- 
ciated a  more  accurate  prevision,  which  succeeds  in  a 
more  correct  adjustment  of  present  investment  to  future 
needs.  The  drift  of  business  enterprise  in  its  newer 
form  is  thus  toward  a  relative  checking  of  the  discrepancy 
between  estimated  and  actual  earnings  or,  in  other  words, 


THE    CRISIS   OF    1907  xxv 

toward  a  retardation  in  the  process  of  overcapitalization. 
The  history  of  trusts  is  still  too  recent,  and  in  not  all  of 
them  are  we  yet  able  to  discern  the  working  out  of  what 
ultimately  will  come  to  be  recognized  as  the  real  laws  of 
their  evolution.  To  those,  however,  who  comprehend 
what  this  revolution  in  business  enterprise  really  implies, 
it  can  scarcely  be  doubtful  that  the  fruit  of  this  steadying 
influence  and  of  the  better  adaptation  of  the  present  to 
the  future  is  already  perceptible.  Notwithstanding  the 
quite  unexampled  prosperity  of  the  last  decade,  the  tempo 
of  overcapitalization  has  been  relatively  less  rapid  and 
the  process  of  readjustment  throughout  the  world  of 
enterprise  has  therefore  been  less  extreme.  Industry 
has  slackened  rather  than  collapsed,  and  the  disturbance 
itself  has  been  comparatively  short-lived,  with  the  prospects 
of  an  early  rebound.  The  influence  of  trusts  in  moderat- 
ing crises  and  in  minimizing  depressions  will  doubtless 
become  more  apparent  with  each  ensuing  decade  in  the 
history  of  modern  industry. 

While  the  general  causes  which  are  responsible  for  the 
crisis  of  1907  have  been  recounted  above,  there  still 
remains  one  point  of  fundamental  importance.  If  we 
compare  our  economic  history  with  that  of  Europe,  we 
observe  that  acute  financial  crises  have  there  almost 
passed  away.  England  has  had  no  severe  convulsion 
since  1866,  and  in  France  and  Germany  also  the  dis- 
turbances are  more  and  more  assuming  the  form  of 
periodic  industrial  depressions  rather  than  of  acute 
financial  crises.  The  responsibility  for  the  continuance 
in  this  country  of  a  phenomenon  which  is  in  large  meas- 
ure vanishing  elsewhere  rests  beyond  all  peradventure  of 
doubt  on  the  inadequacy  of  our  currency  system.  Its 
defects  have  frequently  been  pointed  out,  but  never 
perhaps  so  fully  and  so  convincingly  as  in  the  following 


xxvi  INTRODUCTION 

addresses.  It  is  proverbially  difficult  in  a  democracy 
to  secure  a  hearing  for  the  conclusions  of  experts;  and 
yet  no  lasting  progress  can  otherwise  be  made. 

All  important  reforms  in  currency  legislation  have  been 
in  great  part  due  to  the  influence  of  the  practical  expert. 
Ricardo  was  a  stock-broker ;  Lord  Overstone  and  Gilbart 
were  prominent  bankers;  and  in  France  and  Germany 
the  names  of  the  financiers  who  have  shaped  legislation 
are  legion.  In  view  of  the  fact,  however,  that  most  success- 
ful men  of  affairs  have  neither  the  time  nor  the  talent  for 
the  exposition  of  principles,  the  professorial  reformer 
may  be  permitted  to  quote  in  their  defense  the  witticism 
of  Bernard  Shaw:  "He  who  can,  does;  he  who  cannot, 
teaches."  We  are,  however,  fortunate  in  New  York  in 
possessing  among  our  foremost  bankers  men  who  can  not 
only  do  things,  but  who  can  teach,  and  who  can  put  their 
teaching  into  effective  language. 

In  these  addresses,  which  were  delivered  to  large  audi- 
ences at  Columbia  University  on  successive  Fridays  from 
November,  1907,  to  February,  1908,  two  facts  are  espe- 
cially to  be  emphasized.  The  first  is  that  the  contributors 
to  this  volume  are  not  only  speaking  out  of  the  fullness 
of  their  practical  experience,  but  that  they  have  thought 
deeply  on  various  subtle  points  of  theory.  In  fact,  the 
student  will  seek  in  vain  in  the  scientific  literature  for 
so  clear  and  so  satisfactory  an  exposition  of  some  impor- 
tant topics  as  can  be  found  here.  This  is  true,  for  in- 
stance, of  the  principles  underlying  call-money  fluctuations, 
international  gold  movements,  the  issue  of  emergency 
currency  through  clearing-house  certificates,  and  the 
nature  and  effects  of  commercial  paper  abroad.  Even 
more  valuable  and  significant,  however,  is  the  fact  that 
there  runs  through  the  entire  volume  an  unexpected  har- 
mony of  thought  and  a  close  agreement,  not  only  as  to 
the  ultimate  ideal  to  be  attained  in  our  financial  relations, 


THE   CRISIS   OF   1907  xxvii 

but  as  to  the  next  step  to  be  taken  in  the  legislative  reform 
of  our  currency.  For  all  the  speakers  virtually  agree 
that  even  more  important  than  the  inelasticity  of  our  note 
issue  is  its  decentralization.  The  struggle  which  has 
been  victoriously  fought  out  everywhere  else  must  be 
undertaken  here  in  earnest  and  with  vigor. 

To  have  gathered  upon  one  platform  these  distinguished 
men  of  affairs  and  to  have  induced  them  to  put  their 
ideas  into  print  was  not  an  easy  task.  Columbia  was, 
however,  convinced  that  here  was  both  an  opportunity 
and  an  obligation  — an  opportunity  to  experts  to  give 
to  the  public  the  benefit  of  their  mature  convictions,  and 
an  obligation  on  the  part  of  the  university  to  assume  its 
share  in  the  education  of  the  community  and  to  make  a 
significant  contribution  to  one  of  the  most  live  and  urgent 
of  present-day  problems. 


THE   MODERN   BANK 

BY 

FRANK   A.    VANDERLIP 


THE  MODERN  BANK 

The  cost  of  the  financial  crisis  of  1907,  measured  by 
whatever  standard  you  choose,  measured  either  by  the  di- 
rect financial  losses,  by  the  disorganization  of  industry,  by 
the  destruction  of  confidence,  or  by  the  discouragement  of 
thrift,  makes  it  one  of  the  great  calamities  of  history,  the 
burden  of  which  will  by  no  means  have  been  confined  to 
wealth  alone.  That  burden  falls  with  severity  on  every 
class  and  on  all  sections  of  the  community. 

Financial  crises  have  occurred  with  such  periodic 
regularity  in  the  United  States  that  many  have,  with  Mo- 
hammedan stolidity,  come  to  regard  them  as  "The  Will 
of  Allah,"  and  to  look  alike  upon  banking  panics  and 
crop  failures  as  dispensations  of  an  inscrutable  Provi- 
dence, just  as  we  once  regarded  visitations  of  plagues  and 
fevers. 

In  no  other  great  nation  of  the  world  are  such  financial 
catastrophes  regularly  enacted.  Nowhere  else  may  be 
found  an  important  financial  system  subject  to  such  vio- 
lent turbulence  as  is  the  money  market  of  the  United 
States. 

If  there  is  any  lesson  to  be  learned  from  history,  then 
there  is  none  clearer  than  that  the  financial  system  of  this 
country  inadequately  fulfils  its  functions  and  ineffectively 
serves  the  interests  of  commerce  and  industry.  If  there 
is  any  lesson  to  be  learned  from  experience  and  example, 
there  is  none  more  obvious  than  that  the  other  great 
nations  have  evolved  orderly  systems  of  finance  which  in 
their  application  to  the  problems  of  banking  and  currency 
are  immeasurably  superior  to  our  own,  and  that  there  are 
no  inherent  reasons  in  the  position  of  our  affairs  which 

3 


4  THE   CURRENCY   PROBLEM 

would  prevent  our  profiting  by  their  experience  and 
example. 

If  these  general  statements  are  true,  if  their  force  is  not 
exaggerated,  then  there  can  be  few  subjects  that  are  of 
greater  importance  for  general  public  consideration.  If 
the  crisis,  the  effects  of  which  still  surround  us,  has  been 
a  national  calamity ;  if  similar  crises  have  come  and  under 
unchanged  conditions  are  likely  to  continue  to  come,  with 
periodic  regularity ;  if  intelligent  examination  indicates  that 
such  disturbances  bear  no  relation  of  necessity  to  general 
commercial  development ;  if  the  example  of  other  nations, 
working  under  financial  systems  different  from  ours,  shows 
comparative  freedom  from  such  crises, — then  clearly  it  is 
time  to  give  to  these  somewhat  intricate  problems  the  con- 
sideration which  their  importance  merits.  I  believe  it  is 
a  wise  and  valuable  step  for  this  University  to  undertake 
to  add  something  to  general  public  knowledge  on  the 
subject. 

The  Modern  Bank  is  the  subject  which  has  been  as- 
signed for  opening  the  series  of  discourses  which  have 
been  planned.  In  developing  the  subject  I  shall  under- 
stand it  to  mean  the  commercial  bank  as  distinct  from 
savings  banks  and  trust  companies,  and  shall  more  par- 
ticularly limit  the  consideration  to  the  development  and 
operation  of  commercial  banking  under  the  national 
banking  system. 

The  fundamental  proposition  which  I  first  wish  to 
establish  in  regard  to  all  commercial  banking,  is  that  the 
business  of  the  modern  bank  is  almost  solely  the  exchange 
of  credit,  — to  use  a  clear  but  homely  phrase,  the  swapping 
of  credits.  The  business  of  a  bank  is  not  in  the  main  the 
reception  of  money  and  its  safe  keeping,  nor  is  it  the  loan- 
ing of  money.  The  money  transactions  of  a  bank  are, 
under  ordinary  conditions,  comparatively  insignificant : 
almost  its  entire  business  consists   of  receiving  from  its 


THE    MODERN   BANK  5 

customers  their  evidences  of  indebtedness,  which  have  a 
narrow  currency,  and  giving  to  those  customers  in  ex- 
change the  bank's  evidences  of  indebtedness,  which  have 
a  wide  currency.  These  evidences  of  a  bank's  indebted- 
ness are  then  transferred  from  one  individual  to  another 
and  from  one  bank  to  another,  and  in  that  way  the  credits 
created  serve  the  purpose  of  the  medium  of  exchange  by 
which  perhaps  ninety-five  per  cent  of  the  exchange  tran- 
sactions of  commerce  take  place. 

It  is  a  misconception  to  suppose  that  a  bank  first  accu- 
mulates deposits  and  then  loans  them  out  to  borrowers. 
The  operation  is  the  reverse.  The  bank  first  makes  a 
loan  to  the  borrower  and  in  so  doing  creates  a  deposit. 
The  borrower  exchanges  his  credit,  his  evidence  of  in- 
debtedness, for  the  bank's  credit,  a  deposit  balance.  The 
creation  of  these  credits  has  relation  to  production ;  their 
liquidation  is  related  to  consumption.  If  production 
increases,  the  demand  for  this  exchange  of  individual 
credit  for  bank  credit  increases;  and  the  indebtedness 
incurred  is  liquidated  as  the  articles  upon  which  the 
financial  credit  was  based  enter  into  consumption. 

The  manufacturer  buys  raw  material  and,  in  order  that 
he  may  pay  for  it,  exchanges  his  credit  for  the  bank's 
credit.  The  raw  material  is  converted  into  a  finished 
product  and  sold,  and  by  its  sale  the  means  are  provided 
by  which  the  indebtedness  may  be  liquidated.  The  mer- 
chant who  in  turn  buys  the  manufactured  product  may 
exchange  his  credit  for  the  bank  credit  which  he  will  use 
to  make  the  purchase;  and  when  in  turn  he  sells  to  the 
retailer  or  to  the  consumer,  he  provides  the  means  for  the 
liquidation  of  his  indebtedness.  That  is  the  true  business 
of  a  modern  bank.  It  swaps  its  credit,  which  has  a  wide 
currency,  for  the  credit  of  its  customers,  and  the  bank 
deposits  thus  created  become  the  medium  of  exchange  for 
the  greater  part  of  the  transactions  of  commerce. 


6  THE   CURRENCY   PROBLEM 

Obviously  erroneous  is  the  conception  that  so-called 
deposits  represent  an  actual  deposit  of  money.  When  the 
nature  of  fundamental  banking  transactions  is  understood, 
the  error  is  made  plain ;  but  the  conception  is  a  persistent 
one  and  confuses  much  discussion  of  banking  questions. 
There  is  comparatively  little  money  deposited  in  a  bank. 
No  person  can  say  that  he  has  money  on  deposit.  What 
he  has  is  a  credit  on  the  bank's  ledger.  Such  money  as 
the  bank  holds  belongs  to  the  bank  rather  than  directly 
to  the  depositor. 

Resolved  to  its  simplest  analysis,  the  main  figures  in  a 
bank's  statement  are,  on  the  one  side,  the  totals  of  the 
promises  of  individuals  to  pay  the  bank  money ;  and  on  the 
other  side,  the  promises  of  the  bank  to  pay  the  individuals 
money.  The  one  results  from  the  other ;  the  one  has  been 
exchanged  for  the  other.  Now  while  this  accumulation 
of  evidences  of  indebtedness  —  this  total  of  credits,  called 
deposits  —  are  promises  to  pay  money,  they  become  in 
the  aggregate  an  amount  vastly  greater  than  all  the  money 
that  might  by  any  possibility  be  available  for  such  pur- 
poses. It  should  be  evident  that  it  is  not  possible  nor  de- 
sirable that  a  bank  should  keep  itself  in  a  position  to  pay 
in  money  all  its  deposits  if  demanded  at  once ;  just  as  it  is 
evident  that  its  customers  could  not  redeem  in  money 
their  promises  to  pay  the  bank  if  such  demand  should 
be  made  by  all  banks  at  once.  There  is  a  cooperative 
quality  in  the  functions  of  a  bank  which  should  be  under- 
stood by  the  bank's  customers  and,  whether  understood 
or  not,  must  be  accepted  by  them;  as,  for  instance,  in  a 
time  of  panic,  when  they  have  impressed  upon  their  minds 
that  no  matter  how  solvent  a  bank  may  be,  it  cannot  pos- 
sibly be  in  a  position  to  redeem  all  the  credits  that  are 
evidenced  on  its  books  in  cash  at  a  given  time. 

This  cooperative  quality  ought  to  be  more  clearly  under- 
stood by  bank  customers.     They  are  clear  enough  in  their 


THE   MODERN   BANK  7 

desire  to  enjoy  the  advantages  of  the  modern  banking 
system.  They  wish  to  convert  their  credit  into  a  credit 
that  may  be  used  as  a  generally  acceptable  medium  of 
exchange.  They  expect  to  share  in  the  profits  from  the  use 
of  capital  temporarily  idle  in  the  hands  of  its  owners. 
They  demand  the  facilities  which  the  banking  system 
offers  them  for  making  credits  instantly  and  cheaply 
available  at  distant  points  from  their  places  of  business. 
But  even  though  they  gain  all  these  advantages,  they  fre- 
quently see  with  indistinctness  that  they  themselves  must 
play  their  part  in  the  financial  mechanism ;  that  they  must 
recognize  the  cooperative  nature  of  the  system  and  com- 
prehend that  so-called  deposits  are  not  deposits  of  money, 
but  are  the  book  entries  resulting  from  an  interchange  of 
credits,  and  that  they  are  of  a  nature  where  their  wholesale 
redemption  at  a  particular  time  is  impossible. 

One  of  the  principal  functions  of  money  is  that  of  a 
medium  of  exchange.  In  the  modern  system  of  finance, 
however,  money  is  so  used  only  in  petty  transactions.  In 
transactions  important  in  amount,  money  is  seldom  or 
never  the  medium  of  exchange,  the  medium  in  such  cases 
being  bank  credits.  As  I  have  said  before,  it  is  estimated 
that  ninety-five  per  cent  in  value  of  all  commercial  ex- 
changes are  effected  by  an  interchange  of  bank  credits 
rather  than  by  the  use  of  money.  It  is,  of  course,  obvious 
that  a  bank  credit  must  be  related  to  money  and  in  the 
ordinary  course  must  be  redeemable  in  money.  It  is 
for  this  reason  that  a  bank,  after  giving  its  customers 
credit  upon  its  books,  permits  its  credits  freely  to  be  trans- 
ferred from  one  customer  to  another,  and  agrees  to  honor 
the  credit  upon  demand  by  redeeming  it  in  money.  The 
bank  must  keep  itself  in  a  position  to  fulfil  that  obligation 
by  having  constantly  in  its  vault  an  amount  of  money  equal 
at  least  to  all  of  the  ordinary  demands  that  may  be  made 
on  it.     All  banks  must,  therefore,   hold  a  cash  reserve 


8  THE   CURRENCY   PROBLEM 

against  deposit  liabilities.  The  minimum  amount  of  that 
reserve  in  relation  to  the  deposit  liabilities  may  be  fixed 
by  law,  as  in  the  case  of  national  banks,  or  it  may  be  left 
to  the  discretion  of  the  bankers,  as  is  permitted  by  the  laws 
of  some  states.  Ordinarily  it  may  be  anticipated  that  the 
amount  deposited  in  a  bank  will  approximately  equal  the 
amount  withdrawn.  The  reserves  are  held  against  those 
unusual  occasions  when  demands  predominate.  Reserves 
are  the  only  part  of  the  bank's  assets  that  can  immediately 
be  used  to  pay  off  depositors.  Should  the  predominance 
of  demand  develop  into  a  run  on  a  bank,  its  ability  to  meet 
the  situation  must  depend  upon  its  reserves,  plus  the  amount 
of  its  assets  that  may  be  quickly  converted  into  cash. 

Reserves,  however,  have  another  extremely  important 
function.  They  furnish  a  natural  and  necessary  check  to 
inflation.  Were  there  no  immediate  necessity  for  the 
redemption  in  cash  of  any  portion  of  a  bank's  promises 
to  pay,  the  bank,  so  long  as  it  found  customers  who  would 
borrow  and  whose  obligations  it  was  willing  to  take  in 
exchange  for  its  own,  could  go  on  indefinitely  expanding 
its  liabilities.  The  relation  which  must  be  maintained 
between  total  deposit  obligations  and  cash  reserves  forms 
a  definite  check  upon  such  inflation.  Under  proper 
banking  methods  deposits  cannot  expand  without  a  pro- 
portionate increase  of  reserves. 

Conversely,  supposing  a  bank's  book  credits  to  have 
expanded  to  the  limit  permitted  by  the  legal  relation  be- 
tween deposits  and  reserves,  then  if  the  reserve  be  reduced 
and  the  bank  is  without  means  to  make  good  from  outside 
sources  the  deficit  in  reserve,  it  must  meet  the  situation  by 
the  calling  of  loans.  It  must  induce  its  customers  to  can- 
cel a  portion  of  the  bank's  indebtedness  to  them,  through 
the  bank,  on  its  part,  canceling  an  equal  amount  of  the 
customers'  indebtedness  to  it. 

This   intimate   relation   between   loans,   deposits,    and 


THE   MODERN   BANK  9 

reserve  is  an  extremely  important  one  to  comprehend. 
You  are,  of  course,  familiar  with  the  legislation  concerning 
it,  and  I  shall  recall  it  in  but  the  briefest  words.  Under 
our  National  Banking  Law,  banks  in  the  three  central 
reserve  cities  are  required  to  hold  a  reserve  in  lawful  money 
equal  to  twenty-five  per  cent  of  their  net  deposit  liabilities 
in  their  vaults.  Banks  in  the  forty  reserve  cities  must  also 
hold  a  reserve  equal  to  twenty-five  per  cent  of  their  deposit 
liabilities,  but  they  may  keep  half  of  their  reserve  on  de- 
posit in  banks  in  central  reserve  cities.  Banks  located 
in  neither  the  reserve  nor  the  central  reserve  cities  are 
required  to  keep  reserves  equal  to  fifteen  per  cent  of  their 
deposits,  although  only  two-fifths  of  that  reserve  must  be 
in  their  vaults  and  three-fifths  may  be  with  their  reserve 
agents  either  in  reserve  cities  or  central  reserve  cities. 

As  one  of  the  primary  objects  in  the  organization  and 
operation  of  a  bank  is  to  earn  profits  for  the  stockholders, 
and  as  under  ordinary  conditions  these  profits  are  increased 
in  proportion  to  the  size  of  the  loan  account  of  the  bank, 
it  is  natural  that  banks  will  habitually  keep  their  loan 
account  as  large  as  possible ;  that  is  to  say,  they  will  swap 
their  credit  for  their  customers'  credit  until  the  total  credits 
which  have  been  created  on  their  books  bear  as  high  a  rela- 
tion as  the  law  will  permit  to  the  cash  reserves  which  they 
hold  in  their  vaults.  The  governing  factors  are  the  ability 
of  the  bank  to  make  what  it  regards  as  safe  and  profitable 
loans,  and  its  ability  to  secure  and  to  hold  a  cash  reserve 
which  will  sustain  the  proper  legal  ratio  to  the  credits 
which  it  thus  creates  and  calls  deposits. 

Two  consequences  of  enormous  importance  to  the  whole 
community  flow  from  the  condition  of  affairs  which  has 
been  set  forth.  One  is,  that,  to  avoid  dangerous  inflation, 
bank  reserves  must  be  maintained  in  gold  or  its  equiva- 
lent. It  seems  to  me  obvious  that  the  danger  which  would 
follow  the  plan,  which  many  bankers  favor,  of  counting  in 


10  THE   CURRENCY   PROBLEM 

reserves  the  notes  of  other  national  banks,  would  be  ex- 
treme. Such  action  would  break  off  the  interrelation  of 
volume  of  credit  to  the  gold  stock,  and  would  open  the 
door  to  an  inflation  which  would  be  limited  only  by  the 
bounds  that  the  laws  might  place  upon  the  issue  of  bank- 
notes. These  limits  are  now  marked  by  the  total  of  inter- 
est-bearing obligations  of  the  United  States  and  the  total 
capital  of  the  banks.  Should  the  law  remain  unchanged, 
it  is  easy  to  see  how  some  national  disturbance  might 
sharply  increase  the  total  of  interest-bearing  obligations, 
create  a  basis  for  dangerous  inflation,  result  in  extraor- 
dinary exports  of  gold,  and  bring  our  whole  financial  sys- 
tem face  to  face  with  a  crisis  at  the  very  moment  when 
such  a  crisis  might  be  most  dangerous  to  the  life  of  the 
nation.  Whatever  new  legislation  we  may  have,  there 
should  always  be  and  remain  embodied  in  it  the  principle 
that  a  bank  reserve  must  be  definitely  related  to  the  stock 
of  gold  in  the  bank's  vaults. 

The  other  important  consequence  to  which  I  have 
referred  follows  from  the  fact  that,  while  two  of  the  funda- 
mental qualities  of  money  are  that  it  must  be  a  medium 
of  exchange  and  a  store  of  value,  its  use  for  either  of  these 
purposes  is  a  varying  one.  Under  the  development  of  our 
banking  system  very  little  money  is  ordinarily  used  as  a 
store  of  value.  Occasionally,  when  confidence  is  disturbed, 
distrust  of  banks  widespread,  and  panic  conditions  prevail, 
that  function  of  money  assumes  the  utmost  consequence. 
If  the  disposition  to  use  money  as  a  store  of  value  increases, 
that  is  to  say,  if  hoarding  becomes  general,  the  entire 
credit  fabric  may  fall  in  ruins. 

Under  perfectly  normal  conditions  the  use  of  money  as 
a  medium  of  exchange  shows  a  considerable  variation. 
Nearly  fifty  per  cent  of  the  people  of  the  United  States  are 
engaged  in  agriculture.  The  results  of  their  year's  labor 
are  concentrated  in  the  autumn's  harvest.     That  harvest 


THE   MODERN   BANK  11 

period  marks  an  extraordinary  demand  for  money  as  a 
medium  of  exchange.  It  has  been  estimated  that  during 
the  autumn  months  two  hundred  million  dollars  additional 
currency  is  in  active  use  as  a  medium  of  exchange,  for 
which  there  is  no  such  use  during  the  remaining  months 
of  the  year.  The  total  amount  of  cash  in  the  vaults  of 
national  banks  is  roundly  seven  hundred  million  dollars. 
The  relation  which  the  extra  demand  for  two  hundred 
million  dollars  of  currency  bears  to  the  total  reserve  require- 
ments of  the  national  banks  is  thus  seen  to  be  extremely 
important. 

During,  say,  nine  months  of  the  year  the  medium  of 
exchange  for  ninety-five  per  cent  of  the  transactions 
of  commerce  are  bank  deposits.  These  credits  answer 
every  purpose  of  safety  and  convenience  and  answer 
those  purposes  in  a  degree  far  greater  than  would  money 
itself.  During  three  months  of  the  year  a  large  portion  of 
the  population  of  the  country  have  a  very  considerable  need 
for  a  medium  of  exchange,  but,  having  no  relations  with 
banks,  are  unable  to  make  use  of  bank  credits  in  the  form 
of  the  ordinary  bank  deposit.  A  bank  credit  in  the  form 
of  a  circulating  note  answers  their  purpose  perfectly,  but 
our  laws  have  been  so  contrived  that  the  natural  right  of 
a  bank  to  issue  its  credit  in  the  form  that  its  depositor 
most  desires  has  been  greatly  curtailed.  A  prohibitory 
tax  prevents  all  but  national  banks  from  issuing  circulating 
notes  under  any  conditions,  while  a  national  bank,  in 
order  to  issue  its  notes,  must  first  part  with  its  funds  in 
order  to  buy  government  bonds.  As  the  bonds  sell  at  a 
premium,  it  must  part  with  more  funds  than  the  amount  of 
circulating  notes  it  will  obtain.  A  governor  of  the  Bank 
of  England  has  wisely  said  that  success  in  banking  depends 
upon  being  able  to  distinguish  between  a  note  and  a 
mortgage.  There  is  perhaps  more  of  the  correct  science 
of  successful  banking  in  that  sentence  than  in  any  other 


12  THE    CURRENCY   PROBLEM 

that  was  ever  uttered.  The  business  of  a  bank  is  the  facili- 
tation of  the  current  operations  of  commerce,  the  exchange 
of  its  credits  for  the  credit  of  the  merchant,  and  when  it 
departs  from  that  and  devotes  its  funds  to  the  purchase  of 
long-term  obligations  in  the  form  of  mortgages  and  bonds, 
even  though  they  be  government  bonds,  it  has  departed 
from  the  banking  ideal. 

There  may  be  reasons  in  the  enormous  development  of 
corporations  and  the  great  issue  of  corporate  securities 
which  warrant  a  bank  in  departing  from  strictly  commer- 
cial business ;  but  there  is  no  adequate  reason  in  the  natu- 
ral laws  which  govern  good  banking  to  compel  a  bank  to 
tie  up  its  funds  in  a  long-term  investment  as  a  prerequisite 
for  issuing  its  circulating  notes.  As  our  laws  stand,  there 
is  no  relation  between  the  volume  of  circulating  notes 
and  the  commercial  demand  for  currency.  The  motive 
for  issuing  notes  does  not  lie  in  the  need  for  currency,  but 
in  the  profit  arising  from  an  investment  in  bonds  which 
can  in  part  be  paid  for  by  circulating  notes  obtained 
against  the  collateral  deposit  of  these  bonds. 

For  more  than  forty  years,  under  the  operation  of  the 
National  Banking  Act,  we  have  seen  the  annual  recurrence 
of  the  fall  demand  for  a  larger  amount  of  currency  for  use 
as  a  medium  of  exchange.  In  no  single  year  since  the 
passage  of  that  act  has  the  volume  of  notes  shown  a  natural 
tendency  to  increase  with  this  fall  demand  and  decrease 
when  it  has  ceased  and  currency  become  redundant.  The 
issue  and  retirement  of  national  bank-notes  is  almost  en- 
tirely regulated  by  investment  considerations  affecting 
government  bonds,  and  is  influenced  but  slightly  by  addi- 
tional demands  or  decreased  needs  for  currency. 

We  have  noted  that  banks  will  normally  increase  their 
loans  and  deposits  to  as  large  a  total  as  the  reserve  which 
they  hold  will  legally  permit  them  to  do.  At  all  times, 
under  normal  conditions,  reserves  with  the  banks  of  the 


THE   MODERN   BANK  13 

whole  country  stand  at  practically  the  legal  minimum. 
When  the  period  comes  that  our  currency  is  called  upon 
largely  to  increase  the  work  which  it  does  as  a  medium  of 
exchange,  the  only  place  from  which  this  additional  cur- 
rency can  come  is  the  bank  reserves,  and  a  financial  dis- 
turbance follows  with  almost  as  much  regularity  as  the 
fall  harvests  follow  the  spring  plantings. 

It  would  seem  to  be  one  of  the  most  obvious  of  conclu- 
sions that  if  banks  were  permitted  to  issue  their  credits  in 
the  form  of  circulating  notes,  so  restricted  as  properly  to 
safeguard  the  involuntary  holder,  the  part  which  bank 
credits  play  as  a  medium  of  exchange  would  be  practically 
uniform  throughout  the  year,  instead  of  there  recurring 
such  a  condition  as  now  comes  with  every  fall,  where 
two  hundred  million  dollars  must  be  taken  for  this  pur- 
pose from  the  bank  reserves. 

If  the  banks  are  unable  to  make  good  some  part  of  this 
vast  withdrawal  through  gold  imports  or  through  treasury 
deposits,  the  effect  must  be  that  they  must  reduce  their 
loans  and  deposits  until  they  can  bring  about  the  legal 
relation.  If  no  fresh  supplies  of  reserve  money  can  be 
obtained,  it  would  mean  that  loans  and  deposits  must  be 
reduced  eight  hundred  million  dollars  in  order  again  to 
establish  a  legal  relation  after  the  withdrawal  from  the 
reserve  cities  of  two  hundred  million  dollars  of  reserve 
money.  Of  course,  in  practice  part  of  the  burden  falls 
on  other  than  national  banks,  and  part  of  the  reserve  loss 
is  made  up  from  gold  imports  and  treasury  deposits ;  but 
after  every  device  has  been  utilized  to  soften  the  blow,  the 
withdrawal  of  reserve  money  almost  invariably  leads  to 
disturbance  and  frequently  to  crisis  in  the  money  market. 

There  is  another  consideration  affecting  reserves,  as 
they  operate  under  our  banking  laws,  which  is  of  the  most 
vital  consequence.  We  have  no  banking  system;  that  is 
to  say,  we  have  no  related  organization  of  banks.     Instead 


14  THE   CURRENCY   PROBLEM 

of  that,  we  have  fifteen  thousand  individual  banks,  each 
a  financial  unit,  each  operated  in  regard  to  its  own  posi- 
tion rather  than  with  regard  to  its  relation  to  the  whole 
situation.  A  few  state  banks  have  branches,  it  is  true,  but 
in  the  main  the  statement  of  absolute  individuality  is  cor- 
rect. E  pluribus  unum  has  been  conspicuously  left  out  of 
our  banking  legislation. 

In  a  time  of  crisis  two  things  are  likely  to  happen.  The 
public  becomes  suspicious  of  the  banks  and  resorts  to 
money  as  a  store  of  value,  converting  its  bank  credits 
into  cash  and  hoarding  the  cash.  At  the  same  time,  the 
bankers  are  likely  to  become  suspicious  of  one  another  as 
well  as  apprehensive  of  the  probable  demands  on  the  part 
of  their  customers,  and  there  begins  a  scramble  for  reserve 
money.  Each  institution  stands  alone,  concerned  first 
for  its  own  safety,  and  using  every  endeavor  to  pile  up 
reserves  without  regard  to  what  the  effort  may  cost  the 
financial  situation  at  large. 

The  result  is  an  absolute  immobility  of  reserves,  and  the 
effect  upon  the  general  situation  is  probably  far  more  dis- 
astrous than  that  produced  by  all  the  private  hoarding. 
We  are,  at  the  moment,  in  the  midst  of  such  a  situation. 
Many  banks  are  carrying  reserves  far  in  excess  of  their 
needs.  They  will  neither  increase  loans  and  thus  build 
up  their  deposit  credits  to  a  normal  ratio  to  the  reserve 
they  hold,  nor  will  they  remit  their  surplus  reserve  to  their 
reserve  agents  in  the  financial  centers,  for  fear  that  they 
might  be  unable  to  get  the  money  back  again  promptly  if 
they  should  need  it.  It  requires  but  a  moderate  develop- 
ment of  fear  of  such  character  to  produce  a  most  disas- 
trous result.  There  are  twelve  to  fourteen  billion  dollars 
of  deposits  in  all  the  banks  in  this  country.  The  decision 
on  the  part  of  the  managers  of  each  individual  bank  to 
increase  that  bank's  reserve  but  one  per  cent  above  the 
normal  would  absorb  one  hundred   and   twenty  to  one 


THE    MODERN   BANK  15 

hundred  and  forty  million  dollars,  and  would  become 
hoarding  on  a  gigantic  scale. 

If  our  laws  permitted  branch  banking  by  banks  of  issue, 
such  a  condition  could  not  arise.  In  respect  to  branch 
banking  our  legislation  is  unique.  The  laws  of  every  other 
important  nation  encourage  branch  banking,  and  the 
results  of  it  have  never  tended  to  enslave  the  people,  to 
build  up  dangerous  monopolies,  or  to  increase  the  interest 
rate.  The  result,  in  fact,  has  been  quite  the  reverse. 
Rates  are  kept  uniform  over  a  wide  territory,  the  tendency 
toward  violent  fluctuations  is  reduced,  and  the  privileges 
and  benefits  of  safe  banking  are  widely  disseminated.  I 
believe  that  there  are  groundless  fears  in  many  directions 
in  regard  to  the  possibility  of  evil  from  monopolies,  but  of 
all  commodities  the  last  one  that  will  ever  be  successfully 
monopolized  will  be  credit. 

Throughout  the  terrific  crisis  which  we  have  been  ex- 
periencing, affecting  as  it  has  every  banking  institution  in 
the  United  States,  and  bringing  many  of  them  to  a  point 
where  they  were  forced  temporarily  to  suspend  full  cash 
payments,  we  have  heard  no  word  of  difficulty  beyond 
the  international  border.  Canada  has  been  going  through 
a  land  speculation  more  important,  when  compared  to  her 
total  resources,  than  any  speculation  that  has  been  engaged 
in  here  for  many  years ;  she  has  experienced  all  the  difficul- 
ties that  have  followed  the  world-wide  strain  upon  capital 
which  the  industrial  activities  of  the  last  two  or  three 
years  have  engendered ;  she  has  had  no  wiser  bankers  and 
no  more  conservative  business  men  than  are  the  average 
in  this  country :  but  there  has  been  hardly  a  ripple  on  the 
surface  of  her  financial  affairs,  and  to  our  shame  we  have 
seen  the  banks  of  Canada  perform  a  great  service  in  mov- 
ing the  crops  of  our  own  Northwest,  while  we  stood  finan- 
cially paralyzed,  with  our  credit  fabric  shaken  to  the 
foundation. 


16  THE   CURRENCY   PROBLEM 

Is  there  not  some  obvious  reason  for  this  ?  Is  it  not 
apparent  from  the  most  casual  reading  of  financial  history 
that  business  interests  of  the  United  States  are  subject  to 
periodical  financial  disasters  which  are  avoided  by  the 
business  interests  of  every  other  important  nation  ?  Is  it 
difficult  to  see  that  the  reason  for  this  lies  in  our  laws,  which 
have  warped  and  twisted  the  natural  development  of 
banking  out  of  normal  lines  ?  We  know  that  our  bank- 
note system  grew  out  of  an  ingenious  device  of  a  harassed 
government  to  sell  bonds;  that  the  need  for  the  device 
long  ago  disappeared,  while  the  unfortunately  hampering 
laws  relating  to  it  still  remain. 

Some  bankers  are  apt  to  answer  any  suggestion  for  fresh 
legislation  with  the  declaration  that  the  present  notes  are 
safe,  and  that  they  know  of  no  requisite  in  banking  greater 
than  safety.  Such  an  answer  is  no  answer  at  all.  A  bank 
vault  that  cannot  be  unlocked  may  be  safe,  but  it  will 
poorly  answer  the  purposes  of  business.  A  bank-note 
currency  that  has  no  relation  to  the  demands  of  commerce 
may  be  safe,  but  it  has  in  it  the  elements  of  commercial 
disaster,  the  extent  of  which  cannot  be  measured  by  ordi- 
nary totals. 

Many  of  our  lawmakers  and  bankers  are  ignorant  of  the 
principles  underlying  this  subject.  If  they  were  not,  we 
should  long  ago  have  had  scientific  and  adequate  legisla- 
tion, or  rather,  perhaps,  we  never  should  have  had  the 
legislation  that  has  so  warped  and  hampered  the  natural 
development  of  our  banking  system  as  to  make  it  what  it 
is  to-day. 

I  believe  that  there  is  a  grave  responsibility  upon  the 
financial  metropolis  of  the  country.  New  York  City  is 
the  financial  center.  The  recognized  financial  leaders  are 
here,  and  the  country  may  well  look  here  for  advice  and 
guidance.  If  it  is  true  that  the  awful  panic  through 
which  we  have  been  passing  can  in  great  measure  be  laid 


THE   MODERN   BANK  17 

at  the  door  of  improper  and  inadequate  legislation,  and  I 
believe  that  to  be  true,  then  what  a  solemn  responsibility 
rests  upon  every  one  who  is  in  a  position  to  form  public 
thought  and  to  influence  national  legislation.  It  is  a 
hopeful  sign  that  this  University  recognizes  its  share  in  that 
responsibility. 

I  have  attempted  the  briefest  outline  of  what  I  believe 
to  be  some  of  the  principles  that  must  be  recognized  in  any 
correct  solution  of  the  problems  of  banking  and  currency. 
The  more  clearly  these  principles  are  apprehended,  the 
less  likely  is  one  dogmatically  to  believe  that  he  has  arrived 
at  the  only  correct  solution  of  the  problems. 

There  are  many  solutions,  in  my  opinion,  that  will 
measure  true  by  an  application  of  these  principles.  I  be- 
lieve that  one  ideal  solution  would  combine  the  Scotch  sys- 
tem of  branch  banks  with  the  German  system  of  a  central 
bank  of  issue.  I  recognize  that  there  is  profound  political 
prejudice  against  both  of  these  ideas,  but  I  believe  that  it 
is  a  prejudice  absolutely  lacking  in  sound  foundation. 
That  there  are  other  solutions  I  have  no  doubt.  The 
mobility  of  reserves  wThich  is  an  essential  to  safe  banking 
and  which  is  insured  by  the  branch-banking  system,  may 
possibly  be  secured  through  a  utilization  of  clearing-house 
relationships.  Such  relationships  have  been  signally 
developed  by  the  present  financial  crisis,  and  it  is  not  un- 
likely that  a  legalization  and  expansion  of  the  powers 
which  clearing-houses  have  evolved  in  the  stress  and  exi- 
gencies of  the  crisis  may  offer  a  solution  which  will  be 
more  in  harmony  with  the  present  political  ideas  than  will 
either  the  branch-banking  system  or  the  central  bank. 

The  disposition  to  provide  merely  for  an  emergency 
currency  to  be  secured  by  bonds  other  than  government 
bonds,  would,  I  believe,  fail  almost  utterly  to  recognize 
those  principles  which  should  govern  a  solution  of  the  prob- 
lem.   Any  solution  that  leaves  the  fifteen  thousand  banks 


18  THE   CURRENCY   PROBLEM 

of  this  country  compelled  to  prey  upon  one  another  in 
a  time  of  panic,  with  reserves  immobile,  and  with  man- 
agement isolated  and  having  such  secondary  regard  for 
the  general  welfare,  will  fail  of  its  ultimate  purposes. 

There  are  some  sound  objections  to  extending  to  every 
bank  in  the  national  banking  system  the  power  of  currency 
issue  against  assets.  If  completely  adequate  redemption 
facilities  were  provided,  however,  I  believe  that  the  danger 
would  be  minimized,  if,  indeed,  it  would  not  entirely 
disappear.  That  the  result  aimed  at,  a  currency  expand- 
ing and  contracting  with  the  larger  or  smaller  need  for 
currency  as  a  medium  of  exchange,  will  be  better  met  by 
a  central  bank  having  the  power  of  issue  and  covering  its 
notes  in  part  by  a  gold  reserve  and  in  part  by  legitimate 
commercial  paper,  created  against  actual  commercial 
transactions,  I  have  no  doubt;  nor  do  I  believe  that  the 
political  prejudice  against  a  central  bank  will  be  found  to 
be  so  serious  as  is  apprehended.  If  a  well-considered  and 
definite  plan  for  a  central  bank  were  presented  for  public 
discussion  by  those  whose  duty  it  is  to  offer  a  proper  solu- 
tion of  the  problem,  much  of  the  political  prejudice  would 
disappear. 

The  subject  is  technical.  Opinions  formed  without  a 
grasp  of  fundamental  principles  and  conditions  are  without 
value.  The  verdict  of  the  uninformed  majority  gives  no 
promise  of  being  correct.  In  this  country  we  have  had  one 
great  campaign  of  financial  education.  The  majority  of 
the  voters  of  the  nation  now  know  that  the  free  and  un- 
limited coinage  of  silver  was  a  financial  fallacy.  If  to 
secure  proper  banking  legislation  now  it  is  necessary  for  a 
similar  campaign  of  public  education,  it  is  time  it  were 
begun. 


THE   STOCK   EXCHANGE 

AND 

THE   MONEY  MARKET 

BY 

THOMAS   F.    WOODLOCK 


THE  STOCK  EXCHANGE  AND  THE  MONEY 

MARKET 

The  subject  of  this  address  is  the  Stock  Exchange  in 
relation  to  the  money  market.  It  is  desirable,  however, 
first  to  recall  certain  fundamental  facts  concerning  what  is 
commonly  known  as  the  money  market.  The  essential 
function  of  banking  is  the  mobilization  of  capital  in  the 
form  of  banking  credit  for  use  in  the  multifarious  activities 
of  industry  and  commerce.  Banks,  as  Mr.  Vanderlip 
pointed  out  in  the  preceding  address,  in  a  sense  bring 
credit  into  practical  being  and  set  this  credit  to  work  in 
various  ways.  Taking  the  banking  business  of  the  coun- 
try as  a  whole,  the  largest  use  is  found  for  credit  in  bringing 
about  or  assisting  the  actual  production,  manufacture, 
transportation,  and  distribution  of  commodities  of  general 
use,  such  as  food,  fuel,  and  clothing. 

Credit  of  this  kind  is  made  in  the  shape  of  commercial 
paper,  which  is  discounted  by  the  banks,  this  paper  being 
simply  the  note  of  an  individual  or  individuals  or  of  a  cor- 
poration —  a  promise  to  pay  on  a  certain  date.  The 
general  theory  of  commercial  paper  is  that  it  represents 
borrowing  of  a  purely  temporary  nature  for  a  purpose 
purely  temporary  in  character.  This  purpose  is,  stated 
very  simply,  the  financing  of  commodities  in  process  of 
manufacture  and  distribution  up  to  the  point  where  they 
enter  into  consumption,  it  being  understood  that  the  con- 
sumer's purchase  provides  the  means  of  repaying  the  credit 
borrowed. 

In  other  words,  commercial  paper  provides  a  very  large 
part  of  the  business  community  with  its  working  capital, 

21 


22  THE    CURRENCY   PROBLEM 

and  the  capital  or  credit  thus  provided  goes  for  the  most 
part  into  the  materials  of  production,  being  returned  by 
conversion  of  those  materials  into  usable  commodities 
and  the  sale  thereof.  It  is  contrary  to  the  general  nature 
of  things  that  the  proceeds  of  temporary  loans  should  be 
used  as  fixed  capital  and  sunk  in  the  instruments  of  produc- 
tion, such  as  land,  buildings,  and  machinery,  and  the  like, 
whence  in  the  ordinary  course  of  events  it  is  not  quickly 
recallable.  It  must  be  remembered  that  banks  cannot 
safely  tie  up  depositors'  money  in  fixed  loans  of  this  kind, 
for  they  are  always  liable  to  be  called  on  by  those  depositors 
for  payment.  As  a  rule,  a  bank  arranges  its  purchases  of 
commercial  paper  in  such  a  way  that  there  is  a  constant 
process  of  repayments  going  on  — a  constant  stream  of 
maturities  falling  in.  This  credit  is,  of  course,  put  out 
to  work  again  as  fast  as  it  comes  in,  but  it  is  the  essence 
of  sound  commercial  banking  that  it  should  periodically 
return  to  its  source. 

Probably  two-thirds  at  least  of  the  banking  credit  of  the 
United  States  in  use  in  the  form  of  bank  loans  is  employed 
as  working  capital  in  this  way  and  is  represented  in  bank 
safes  by  commercial  paper.  And  while  there  is  at  times 
—  as  in  the  last  year  or  two  probably  —  a  certain  amount 
of  unwise  temporary  borrowing  for  the  purpose  of  fixed 
investment,  the  great  bulk  of  this  credit  truly  represents 
working  capital  employed  in  the  preparation  and  distribu- 
tion of  commodities  of  general  use.  Next  to  commercial 
paper,  the  principal  use  of  banking  credit  in  the  United 
States  is  found  in  loans  upon  securities.  These  loans 
differ  fundamentally  in  more  respects  than  one  from  loans 
which  are  made  in  the  form  of  commercial  paper.  In 
the  latter  case  a  bank  advances  credit  to  an  individual  or 
individuals  without  security,  trusting  entirely  to  what  is 
commonly  called  the  individual  credit  of  the  borrower. 
In   the   case   of  loans   on  securities   the   bank  takes,  not 


STOCK  EXCHANGE  AND  MONEY  MARKET   23 

merely  the  borrower's  note,  but  also  collateral  security  in 
the  form  of  stocks  or  bonds  of  corporations,  states,  or  mu- 
nicipalities. Thus  the  latter  is  a  secured  loan  in  the  ordi- 
nary sense  of  the  word,  while  the  former  is  not.  The  bank, 
moreover,  in  the  case  of  security  loans,  is  secured  further 
in  that  it  does  not  advance  to  the  borrower  the  full  market 
value  of  the  collateral  security  deposited,  but  only  a  portion 
thereof.  The  practice  is  that  the  borrower  deposits  secu- 
rities to  the  extent  of  at  least  twenty  per  cent  market  value 
over  the  amount  of  the  loan,  and  that  this  margin  of  twenty 
per  cent  is  kept  up  during  the  life  of  the  loan,  whether  it  be 
a  call  loan  or  a  time  loan.  Thus  in  the  case  of  loans  on 
securities,  the  bank  which  makes  the  advance  is  fortified, 
not  merely  by  the  note  of  the  borrower,  but  also  by  securities 
of  a  market  value  twenty  per  cent  greater  than  the  amount 
of  the  loan.  As  a  matter  of  fact  it  may  be  said  that  in 
practice  the  reliance  of  lenders  is  apt  to  be  mainly  on  the 
collateral  of  the  borrower. 

The  character  of  a  security  from  the  point  of  view  of  the 
banker  who  lends  upon  it  is  determined  by  the  ease  or  cer- 
tainty with  which  it  can  be  sold  —  in  other  words  the  de- 
gree of  its  convertibility.  Consequently  the  existence  of  a 
market  for  securities  is  the  first  requisite  for  any  system 
of  lending  on  securities.  Without  such  a  market  there 
would  be  very  little  credit  used  in  this  way  —  and  for  that 
matter  we  may  say  that  there  would  probably  be  very 
few  securities  in  existence.  For  while  the  corporation 
idea  is  quite  practicable  —  and,  indeed,  is  to  some  extent 
practised  —  in  the  case  of  enterprises  where  but  a  few 
men  are  concerned  and  where  ownership  of  interest  is 
permanent  and  unchanging,  its  great  extension  has  been 
rendered  possible  only  by  enlisting  the  active  interest  of 
the  multitude,  and  for  this  a  wide  and  free  market  is  an 
indispensable  piece  of  machinery.  Hence  the  existence 
of  the  stock  exchange,  without  which  the  modern  system 


24  THE   CURRENCY   PROBLEM 

of  corporate  enterprise  — the  railroads  being  the  most 
notable  example  — would  certainly  not  have  attained  to 
anything  like  its  present  growth. 

Corporation  securities,  whether  evidences  of  ownership 
such  as  stocks,  or  evidences  of  debt  such  as  bonds,  prac- 
tically all  represent  capital  mobilized  for  the  purpose  of 
fixed  investment  in  the  instruments  of  production  and  dis- 
tribution of  commodities  such  as  land,  machinery,  rail- 
roads, buildings,  and  the  like.  Just  as  a  bank  mobilizes 
capital  for  temporary  use  in  discounting  commercial  paper, 
a  corporation  mobilizes  capital  for  permanent  use  in  fixed 
plant.  It  divides  this  capital  into  convenient  shares, 
which  are  readily  transferable  from  one  owner  to  another, 
thus  enabling  small  capitalists  to  invest  in  enterprises 
which  would  otherwise  be  closed  to  all  who  could  not 
command  capital  in  very  large  amounts.  Just  as  com- 
modities of  general  use  are  manufactured  with  a  view  to 
their  consumption  by  individuals,  so  we  may  also  say  that 
the  ultimate  destiny  of  securities  is  lodgment  in  the  hands 
of  people  who  practically  consume  them,  namely,  investors. 
For  to  all  intents  and  purposes  securities  placed  with  in- 
vestors may  be  considered  as  more  or  less  consumed.  At 
least  they  are  removed  from  what  may  be  called  stocks  on 
hand.  The  investor  buys  securities  in  order  to  obtain  a 
return  from  them,  and  usually  also  with  the  hope  that  they 
will  increase  in  value  while  in  his  hands.  The  greater 
the  security  of  the  yield  from  a  bond,  the  greater  the  sta- 
bility of  dividends  on  a  stock,  the  more  attractive  it  is  from 
the  investor's  point  of  view ;  and  we  may  set  it  down  as  a 
principle  that,  according  as  the  margin  of  safety  increases 
in  the  case  of  bonds  and  according  as  the  earning  capacity 
represented  by  stocks  increases,  both  bonds  and  stocks 
tend  to  be  more  largely  consumed  by  investors. 

The  production  of  commodities  of  general  use  is  carried 
on  by  manufacturers  ahead  of  current  needs.     Goods  are 


STOCK  EXCHANGE  AND  MONEY  MARKET   25 

made  in  advance  of  the  actual  demand  for  them.  They 
are  carried  in  stock  pending  their  sale  to  the  retailer, 
and  frequently  are  made  many  months  ahead  of  the  time 
when  they  are  needed  for  consumption.  In  other  words, 
the  needs  of  the  consumer  are  carefully  studied  in  advance 
and  provided  for  as  far  as  the  ingenuity  of  man  can  provide 
for  them.  What  is  true  of  commodities  is  in  the  main  true 
of  securities.  The  methods  of  that  portion  of  the  financial 
world  which  is  generally  concerned  with  the  making  and 
the  merchandizing  of  securities  are  such  that  there  is 
always  in  existence  a  large  mass  of  securities,  both  stocks 
and  bonds,  which  are  intended  ultimately  for  consumption 
by  investors.  I  must  not  be  understood  as  saying  that 
securities  are  always  created  in  good  faith  and  with  the 
idea  that  they  will  ultimately  qualify  for  the  conservative 
investor,  — very  far  from  it.  But  I  feel  entirely  safe  in 
saying  that  securities  are  all  created  originally  with  the  idea 
that  they  can  be  sold  for  money,  and  they  cannot  be  sold 
for  money  unless  the  buyer  thinks  that  he  at  least  can  sell 
them  again.  This  he  cannot  do  unless  they  possess,  or 
appear  to  possess,  real  value,  actual  or  potential;  that  is, 
unless  they  have,  or  seem  to  have,  the  power  to  return  inter- 
est or  dividends.  The  only  value  that  a  security  can  have 
is,  in  the  long  run,  the  kind  of  value  that  appeals  to  the  in- 
vestor; namely,  that  which  rests  on  the  capacity  of  these 
securities  to  yield  interest  or  dividends.  Not  even  a  specu- 
lator will  buy  a  security  of  any  kind  unless  he  thinks  he 
sees  some  potential  value  in  it,  and  this  value  must  have 
ultimate  reference  to  its  income-paying  capacity.  There 
must  be  some  potentiality  of  this  kind,  however  remote; 
otherwise  the  securities  cannot  be  sold  even  to  a  speculator, 
and  if  they  cannot  be  sold  they  will  not  be  made. 

By  reason  of  these  conditions  there  is  always  in  existence 
a  large  mass  of  securities  which  have  been  created  with  an 
eye  to  their  ultimate  sale  to  and  consumption  by  investors, 


26  THE   CURRENCY   PROBLEM 

and  this  mass  of  securities  may  be  regarded  as  undergoing 
a  process  of  preparation  for  the  investor.  In  this  mass 
there  will  be  bonds  and  stocks  of  every  kind  and  every 
grade  of  value,  ranging  from  new  bond  issues  of  the  most 
undoubted  character  which  are  ready  to  pass  almost  imme- 
diately into  consumption,  down  to  common  stocks  which 
possess  at  the  best  barely  enough  potentiality  of  ultimate 
value  to  warrant  an  occasional  speculative  purchaser 
"taking  a  flyer  in  them."  It  may  be  here  pointed  out, 
moreover,  that  in  the  preparation  of  securities  for  investors 
time  is  a  more  or  less  necessary  element :  a  bond  must  be 
seasoned  to  some  extent  by  regular  payment  of  coupons 
—  unless  it  be  a  bond  of  the  highest  character  made  by  a 
borrower  of  the  first  rank  — before  it  finally  finds  its  way 
into  a  permanent  home;  and  a  stock  also  requires  time 
to  demonstrate  its  ability  to  yield  regular  dividends  at  a 
satisfactory  rate.  .  Again,  speculation,  that  most  potent 
of  all  factors  in  human  activities,  operates  so  as  to  bring 
into  existence  the  securities  at  the  very  earliest  moment  that 
a  potentiality  of  value  can  be  demonstrated,  and  it  takes 
time  to  develop  this  potentiality  into  an  actuality.  The 
merchandizing  and  distributing  of  securities  give  employ- 
ment to  a  large  class  of  people,  who  have  a  most  elaborate 
system  and  who  carry  — as  jobbers,  wholesalers,  and  dealers 
at  retail  —  a  very  large  stock  of  securities  to  suit  all  tastes 
from  the  most  speculative  to  the  most  cautious.  The  term 
"Wall  Street"  is  commonly  used  to  describe  this  class  in 
the  community.  It  includes  all  who  make  a  business  of 
manufacturing,  distributing  at  wholesale  or  retail,  and 
speculating  in  securities  of  all  kinds. 

Just  as  the  manufacturers,  distributors,  and  dealers 
in  commodities  of  general  use  must  of  necessity  be  bor- 
rowers of  money  on  a  large  scale,  so  is  Wall  Street  necessa- 
rily a  borrower  of  money  on  a  large  scale,  with  securities  as 
collateral,  pending  the  placing  of  these  securities  with  the 


STOCK  EXCHANGE  AND  MONEY  MARKET    27 

investor  as  the  ultimate  consumer.  The  process,  therefore, 
of  making  securities  and  merchandizing  them  after  they 
are  made  gives  employment  to  an  entire  class  of  people,  all 
of  whom  must  borrow  money.  At  every  stage  of  the  pro- 
cess the  use  of  banking  credit  is  required,  from  the  origi- 
nal syndicate  which  forms  the  corporation  at  the  start  or 
underwrites  the  issue,  to  the  dealer  who  sells  to  the  inves- 
tor. And  to  this  is  due  the  fact  that  so  large  a  sum  of  bank- 
ing credit  is  loaned  on  collateral  security.  That  this  credit 
can  be  safely  loaned  in  this  way  is  due  to  the  existence  of  a 
free  and  wide  market  for  securities,  a  market  which  is 
supplied  by  the  New  York  Stock  Exchange. 

We  need  not  stop  to  consider  in  any  detail  the  constitu- 
tion of  the  Stock  Exchange.  All  that  is  necessary  to  note 
is  that  it  is  a  purely  voluntary  association,  depending  upon 
no  monopoly  privilege  other  than  that  which  nature  grants 
to  the  most  efficient,  and  that  it  has  attained  to  and  holds 
its  position  by  right  of  many  scores  of  years  of  efficient 
service.  Other  exchanges  exist  elsewhere  in  the  United 
States,  but  all  are  practically  tributary  to,  and  dependent 
on,  the  New  York  Stock  Exchange  as  the  primary  market 
for  securities  in  this  hemisphere.  This  body  has  taken  and 
habitually  enforces  every  possible  precaution  to  protect 
the  freedom  of  its  market  and  to  prevent  —  so  far  as  it  can 
be  prevented  — its  use  for  fraudulent  or  improper  pur- 
poses. It  cannot  prevent  rash  speculations,  it  cannot 
guarantee  the  value  of  securities  admitted  to  dealings  on 
its  floor ;  but  it  can  and  does  do  all  that  can  be  done  to  make 
and  to  keep  a  fair  market  for  securities  on  its  list,  a  market, 
that  is  to  say,  where  buyer  and  seller  can  meet  and  do  busi- 
ness openly  at  a  fair  market  price.  Whatever  its  faults 
may  be,  it  is  at  least  in  every  sense  of  the  word  a  true  mar- 
ket for  securities. 

In  two  things  New  York  differs  from  every  other  finan- 
cial center  of  the  world.     One  is  that  the  business  of  the 


28  THE    CURRENCY   PROBLEM 

Stock  Exchange  is  conducted  on  the  basis  of  daily  settle- 
ments, whereas  practically  all  the  important  exchanges  of 
Europe  do  business  on  the  basis  of  monthly  or  semi- 
monthly settlements.  The  other  is  that  in  New  York 
there  is  a  "call-money"  market  of  large  dimensions,  the 
like  of  which  exists  nowhere  else  on  the  globe.  The 
latter  is  rendered  possible  by  the  former  and  could  not 
exist  without  it.  The  rules  of  the  New  York  Stock  Ex- 
change permit  contracts  which  may  be  called  futures  or 
time  bargains  under  certain  conditions.  Stocks  can  be 
bought  or  sold  at  "sellers'"  or  "buyers'  option"  for  thirty 
or  sixty  days.  As  a  matter  of  fact,  however,  practically  all 
the  business  is  conducted  either  for  cash  or  as  it  is  termed 
"regular  way."  Transactions  for  cash  are  settled  on  the 
day  the  transaction  is  made.  Transactions  made  "regu- 
lar way,"  which  account  for  nearly  ninety-nine  per  cent  of 
all  the  transactions  made  on  the  Exchange,  are  settled  on 
the  day  following  their  making.  The  rules  require  that  the 
seller  of  securities  shall  make  delivery  of  them  on  the  next 
full  business  day  following  the  sale,  not  later  than  2.15  p.m. 
If  at  that  time,  which  is  known  as  "delivery  hour,"  the 
seller  has  not  delivered  the  securities  which  he  has  sold  to 
the  buyer,  the  buyer  can,  if  he  so  pleases,  enforce  delivery 
by  having  the  securities  bought  in  on  the  Stock  Exchange 
"  under  the  rule,"  at  the  cost  of  the  seller  who  failed  to 
make  delivery.  If  he  does  not  do  this,  the  transaction  goes 
over  to  the  next  business  day,  when  the  same  conditions 
rule.  It  may  be  stated  here  that  the  clearing-house  system 
now  in  use  for  many  years  by  the  Exchange  saves  an  im- 
mensity of  trouble  to  everybody  by  eliminating  the  duplica- 
tion of  deliveries.  It  in  no  way,  however,  affects  the  main 
principles  of  the  case  and  hence  need  not  be  considered 
here.  The  chief  point  is  that  the  New  York  Stock  Exchange 
furnishes  a  free  market  for  securities  on  the  basis  of  cash 
at  twenty -four  hours.     Consequently  call  loans  on  security 


STOCK   EXCHANGE   AND   MONEY   MARKET        29 

collateral  are  possible,  for  the  stock  market  furnishes 
the  means  of  paying  loans  if  liquidation  is  necessary. 

You  are  doubtless  familiar  with  the  nature  of  a  call 
loan.  It  differs  from  a  time  loan  merely  in  that  repay- 
ment can  be  demanded  by  the  lender  on  call  or  tendered 
by  the  borrower  at  will.  The  only  restriction  which  is 
observed  in  the  matter  of  call  loans  is  that  it  is  not  custom- 
ary in  Wall  Street  to  demand  or  to  tender  payment  of 
call  loans  on  any  day  after  1  p.m.  on  that  day.  A  time 
loan,  of  course,  is  made  for  a  definite  period  at  a  definite 
rate  of  interest  and  has  a  definite  maturity;  the  interest 
rate  on  call  loans  may  change  from  day  to  day.  The 
existence  of  a  large  call-loan  market  is  the  feature  which 
is  characteristic  of  the  New  York  money  market,  which 
distinguishes  it  from  other  money  markets,  which  most 
definitely  expresses  the  relations  of  the  Stock  Exchange 
with  the  money  market,  and  which  forms  the  main  subject 
of  present  consideration. 

Of  the  total  mass  of  credit  used  in  security  loans  in  con- 
nection with  the  operations  of  the  financial  community, 
probably  two-thirds  at  least  is  loaned  "on  time."  Houses 
which  are  engaged  in  the  process  of  merchandizing  securi- 
ties —  chiefly  bonds  —  naturally  have  to  provide  for  their 
requirements  mainly  in  this  way,  as  their  stock  consists 
largely  of  securities  which  are  not  quickly  convertible 
into  cash  because  speculation  is  a  comparatively  small 
factor  in  the  market  therefor.  Houses  and  individuals 
which  are  engaged  in  semi-speculative  operations  such  as 
promotions  are  governed  by  the  same  necessities  and  must 
be  sure  of  their  resources ;  at  least  they  cannot  safely 
place  themselves  in  a  position  where  they  may  have  to 
find  large  sums  of  money  at  a  day's  notice.  Stock-bro- 
kerage houses  — commonly  known  as  commission  houses 
—  who  conduct  a  general  investment  and  speculative 
business  for  clients  also  find  that  it  is  verv  advisable  to 


30  THE   CURRENCY   PROBLEM 

provide  themselves  with  "time  money"  to  the  extent  of  at 
least  one-half  of  their  normal  requirements.  If  a  house 
of  this  character  has  a  general  borrowing  capacity  of 
five  million  dollars  — which  means  a  capital  of  some- 
where between  one  and  one  and  a  half  millions  —  it  will 
in  normal  times,  when  doing  business  up  to  its  capacity, 
carry  probably  two  million  dollars  of  time  money,  relying 
on  the  call-money  market  for  the  balance.  Generally 
speaking,  it  is  true  that  in  times  of  extreme  monetary 
ease,  when  bank  reserves  are  large,  the  proportion  of  money 
loaned  on  security  time  loans  tends  to  decrease  because 
borrowers  are  willing  to  take  the  chance  of  daily  borrow- 
ing at  low  rates.  Also  when  the  money  market  is  notably 
stringent,  the  proportion  borrowed  on  call  tends  to  rise 
because  lenders  are  loath  to  make  fresh  time  loans  as  the 
old  ones  mature,  preferring  to  keep  their  money  out  on 
call.  Thus  the  volume  of  call  loans  tends  to  swell  at 
either  extreme  of  money  rates,  in  the  one  case  being  forced 
on  the  market  by  lenders  who  are  overstocked,  and  in  the 
other  case  being  eagerly  sought  by  borrowers  who  must 
have  accommodation.  This  is  one  reason  for  the  wide 
fluctuations  in  call-money  rates  recorded  every  year.  We 
shall  presently  see  that  there  are  others. 

Time  loans  in  the  financial  district  are  privately  made, 
a  large  business  being  done  by  money  brokers  who  put 
out  money  on  commission  for  the  lenders.  Their  task  is 
to  seek  borrowers  or  lenders,  as  the  case  may  be,  and  to 
bring  them  together.  Of  course  a  great  many  loans  are 
made  without  the  intervention  of  brokers  at  all,  the  bor- 
rower himself  "shopping"  for  his  money  and  making  his 
own  negotiation.  For  "call  loans"  there  has  been  estab- 
lished on  the  Stock  Exchange  a  regular  and  open  market, 
where  a  large  business  is  done  every  day  in  normal  times. 
And  while  a  large  call-loan  business  is  done  privately  out- 
side of  the  Exchange,  the  transactions  at  the  money  post 


STOCK  EXCHANGE  AND  MONEY  MARKET   31 

on  the  floor  have  a  large  influence  in  making  the  ruling 
rates.  The  call-money  market  on  the  Stock  Exchange 
usually  opens  at  about  11  o'clock  on  full  business  days. 
Saturday  being  a  half  day's  business  only,  there  is  no  de- 
livery of  securities  on  that  day,  and  Friday's  and  Saturday's 
transactions  are  settled  on  the  following  Monday.  There 
is  no  call-money  market  on  Saturdays.  At  about  11  o'clock 
the  banks  in  New  York  City  know  more  or  less  what  their 
balances  are  as  a  result  of  that  day's  clearings,  and  by  that 
time  they  have  called  such  loans  as  they  need  to  call  in 
order  to  meet  their  requirements  if  they  have  such  require- 
ments. Sometimes  occasions  arise  when  they  have  to 
call  loans  for  payment  a  little  later  in  the  day,  but  as  a  rule 
they  know  more  or  less  how  they  stand  at  about  1 1  o'clock 
and  have  acted  accordingly.  Brokers  also  know  more  or 
less  what  the  day's  requirements  are  and  whether  they 
have  "money  over"  or  need  money.  At  about  11  o'clock 
they  gather  at  the  money  post  on  the  floor  of  the  Stock 
Exchange  and  the  business  of  borrowing  and  lending 
begins.  Brokers  are  there,  representing  banks  and  insti- 
tutions with  balances  to  lend ;  other  brokers  are  there  with 
their  own  surplus, — balances  which  will  not  be  needed 
that  day  and  which  represent  perhaps  their  own  private 
capital  that  is  temporarily  unemployed  or  money  borrowed 
on  time  for  which  they  have  no  present  use.  A  record  of 
an  informal  character  is  kept  at  the  post  of  the  loans  as  they 
are  made,  with  amount  and  interest  rate,  and  a  fair  average 
of  the  transactions  up  to  about  11.30  a.m.  is  struck;  and 
the  fair  average  rate  resulting  from  these  transactions  is  in 
normal  times  taken  as  the  renewal  rate  on  standing  loans 
for  that  day.  Of  course,  this  rate  is  really  determined  in 
the  main  by  the  banks  themselves,  for  the  amount  of  bank 
money  at  the  post  really  makes  the  market  rate.  Brokers 
who  have  call  loans  standing  with  each  other  renew  these 
loans  for  the  day  at  this  renewal  rate.     The  banks  them- 


32  THE   CURRENCY   PROBLEM 

selves  make  their  own  renewal  rates  directly  with  their  own 
borrowers,  and  the  renewal  rate  at  the  Exchange  governs 
principally  the  loans  between  Stock  Exchange  firms. 
While  there  is,  as  a  rule,  general  correspondence  between 
this  renewal  rate  on  the  Exchange  and  renewal  rates  made 
by  banks  and  other  institutions,  it  not  infrequently  hap- 
pens that  the  renewal  rate  on  the  Exchange,  especially  in 
times  of  stringency,  tends  to  be  somewhat  lower  than  the 
rates  made  by  the  banks. 

By  reason  of  the  unwritten  law  in  Wall  Street  that  call 
loans  shall  not  be  disturbed  after  1  p.m.  borrowers  know 
at  that  hour  how  they  stand  as  regards  existing  loans. 
But  it  may  happen  that  securities  which  they  expect  to 
receive  may  not  be  delivered  to  them,  or  that  securities 
which  they  expect  to  deliver  cannot  be  delivered  on  that 
day,  and  at  2.15  p.m.,  when  the  delivery  of  securities  ceases 
for  the  day,  they  may  have  "money  over"  or  may  "need 
money."  As  a  consequence  there  is,  around  this  time, 
usually  a  fresh  outburst  of  activity  in  money  after  two  hours 
of  dullness,  those  brokers  with  "money  over"  supplying 
the  needs  of  those  who  want  money,  and  by  3  p.m.,  the 
process  is  completed  for  the  day. 

In  ordinary  times  the  amount  of  money  loaned  at  the 
money  post  in  the  Exchange  is  not  very  large.  But  in 
abnormal  times,  when  there  is  disturbance  in  the  money 
market  and  activity  in  the  security  markets,  very  large 
amounts  are  borrowed  and  lent  on  the  floor.  There  were 
days  during  the  recent  stringency  when  probably  twenty 
or  thirty  million  dollars  were  borrowed  and  lent,  and  when 
the  money  post  in  the  Exchange  was  the  storm  center 
of  the  entire  disturbance.  This  was  notably  the  case  on 
that  afternoon  when  the  famous  twenty-five  million  dollars 
bankers'  pool  was  hurriedly  formed  to  supply  the  needs 
of  the  Stock  Exchange.  In  point  of  fact,  it  may  be  said 
that  the  money  market  on  the  Exchange  is  a  very  faithful 


STOCK   EXCHANGE   AND    MONEY   MARKET        33 

index  or  barometer  to  the  call-loan  market  generally ;  and 
when  little  business  is  done  there,  it  means  that  there  is 
little  change  in  conditions,  standing  loans  being  renewed 
instead  of  shifted.  Whenever  there  is  a  general  disturb- 
ance or  shifting  of  call  loans,  it  is  quickly  reflected  on  the 
floor  of  the  Stock  Exchange. 

One  disadvantage  sometimes  results  from  the  workings 
of  an  open  call-money  market  on  the  floor  of  the  Stock 
Exchange,  and  it  arises  from  an  extension  of  the  principle 
of  equality  in  the  matter  of  credit  so  far  as  purchase  or 
sale  of  securities  is  concerned  —  which  is  one  of  the  funda- 
mental principles  of  the  Exchange  — to  the  matter  of 
borrowing  money,  which  is  quite  another  thing.  The  rate 
for  strong  borrowers  with  good  collateral  is  frequently 
made  by  the  bids  of  weak  borrowers  with  poor  collateral, 
which  should  not  be  the  case,  even  when,  as  I  have  pre- 
viously pointed  out,  the  main  reliance  of  lenders  is  apt  to 
be  on  collateral.  Individual  credit  should  count  for  some- 
thing at  all  times  in  the  money  market,  and  to  the  extent 
that  the  Stock  Exchange  system  of  call-money  borrowing 
and  lending  tends  to  obscure  this,  it  may  be  considered  as 
defective. 

We  have  seen  whence  comes  the  demand  for  loans  on 
securities.  It  comes  from  the  people  who,  as  promoters, 
syndicators,  merchants,  jobbers,  brokers,  or  speculators, 
are  carrying  that  floating  mass  of  securities  of  all  kinds 
(ranging  from  savings-bank  bonds  to  non-dividend-paying 
stocks)  which  has  not  as  yet  gone  into  the  hands  of  per- 
manent investors,  whether  they  be  corporations  or  indi- 
viduals. Whence  comes  the  money  that  is  loaned  to  these 
people  on  these  securities  ? 

New  York's  position  as  the  financial  center  of  the  United 
States  is,  of  course,  the  principal  answer  to  that  question. 
This  city,  offering  employment  for  capital  under  condi- 
tions of  almost  absolute  safety,  naturally  attracts  capital 


34  THE   CURRENCY   PROBLEM 

very  strongly  as  against  any  other  section.  Even  were 
there  no  National  Bank  Act  creating  reserve  cities,  New 
York's  banks  would  naturally  tend  to  become  to  a  very 
large  extent  the  depositaries  of  the  nation's  surplus  cash. 
Under  the  National  Bank  Act  New  York  is  in  effect  the 
permanent  holder  of  a  great  deal  of  cash,  representing  a 
portion  of  the  reserves  of  country  banks  deposited  with 
New  York  national  banks  at  interest.  This  country 
money  is  one  of  the  most  important  factors  in  determining 
money  rates  in  New  York.  Besides  this  there  is,  of  course, 
a  large  volume  of  private  capital  of  all  sorts  in  New  York 
which  finds  employment  in  connection  with  the  Stock  Ex- 
change. Insurance  companies,  savings  banks,  large  cor- 
porations whose  principal  offices  are  in  New  York,  all  these 
add  their  quota  to  the  great  volume  of  banking  capital 
available  in  this  city.  But  probably  the  country  bank 
money,  as  it  is  called,  is  the  most  powerful  determinant  of 
call-money  rates  in  the  long  run.  Every  year  there  are 
certain  important  pulsations  of  money  circulation  in  the 
United  States,  arising  chiefly  from  the  planting  and  har- 
vesting of  the  crops  in  the  spring  and  the  fall.  To  carry 
through  these  operations  and  the  moving  of  the  crops  when 
harvested,  cash  has  to  be  sent  in  great  volume  into  the 
country,  where  it  is  scattered  as  a  fine  rain,  so  to  speak, 
over  a  large  area,  paying  farm  hands  for  their  labor  and 
farmers  for  their  crops.  This  money  returns  again  grad- 
ually through  the  small  streams  and  rivers  of  trade  to  the 
reservoirs  or  storage  lakes  where  it  is  kept  until  it  is  again 
needed.  New  York  is  such  a  storage  lake ;  it  is  drawn 
down  in  the  spring  and  in  the  fall,  and  it  is  filled  up  in 
the  summer  and  the  winter.  New  York  also  distributes 
most  of  the  interest  and  dividend  money  disbursed  by  the 
large  corporations,  which  makes  a  small  monthly  pulsation 
in  circulation,  and  it  also  is  the  center  of  mercantile  settle- 
ments —  to  say  nothing  of  its  being  the  foreign  exchange 


STOCK  EXCHANGE  AND  MONEY  MARKET    35 

market  of  the  country  as  well.  The  play  of  the  various 
factors  connoted  in  these  things  upon  the  call-money 
market,  which  is  also  acted  upon  by  the  forces  of  specula- 
tion in  the  stock  market,  necessarily  makes  the  call-money 
market  a  most  delicate  and  sensitive  piece  of  machinery, 
the  equilibrium  of  which  tends  to  be  considerably  unstable, 
except  in  periods  of  general  business  inactivity,  when  large 
masses  of  capital  are  out  of  employment. 

Inasmuch  as  the  call-money  market  consists  largely  of 
the  fluctuating  surplus  cash  of  lenders  and  the  fluctuating 
requirements  of  borrowers,  it  is  quite  natural  that  it  should 
fluctuate  violently,  for  it  is  subjected  to  an  ebb-and-flow 
movement  of  dimensions  very  large  in  proportion  to  its 
total  volume  as  a  result  of  the  movements  of  cash  already 
referred  to.  Moreover,  it  must  be  remembered  that  there 
is  no  central  governing  influence  in  the  call-money  market, 
either  in  the  shape  of  concentration  of  borrowing  or  in  that 
of  concentration  of  lending.  The  open  market  estab- 
lished on  the  floor  of  the  Stock  Exchange  cannot  be  con- 
sidered a  governing  influence  at  all  in  the  true  sense  of  the 
word.  There  is  open  competition  among  lenders  at  all 
times  when  money  is  easy,  and  only  in  the  face  of  panic 
is  there,  as  a  rule,  anything  like  concerted  action  on  their 
part.  In  times  of  ease  competition  among  lenders  is  very 
keen  in  character  and  has  the  effect,  in  all  probability,  of 
driving  rates  lower  than  they  would  otherwise  go.  Con- 
versely, when  money  commences  to  become  stringent  with- 
out the  danger  point  of  panic  having  been  reached,  the 
absence  of  concerted  action  on  the  part  of  lenders  leads  to 
perhaps  unnecessary  alarm  and  unnecessary  shifting  of 
loans.  This  brings  about  an  unnecessary  restriction  of 
accommodation  which  would  be  avoided  if  concerted  action 
were  the  rule.  So  far  as  borrowers  are  concerned,  of 
course,  competition  becomes  extremely  active  whenever 
the  market  hangs  out  danger  signals.     The  absence  of  a 


36  THE    CURRENCY   PROBLEM 

central  governing  factor  in  the  money  market  such,  for 
example,  as  is  the  Bank  of  England  in  London,  the  Bank 
of  France  in  Paris,  or  the  Imperial  Bank  of  Germany  in 
Berlin,  is  very  noticeable  and  must  be  considered  one  of 
the  factors  which  tend  to  aggravate  the  fluctuations  in  call 
money.  Of  late  years,  moreover,  another  somewhat  ag- 
gravating influence  has  been  felt  in  the  shape  of  what  have 
come  to  be  known  as  "out-of-town"  bank  loans.  These 
are  loans  made  by  out-of-town  institutions  acting  through 
New  York  banks  and  trust  companies,  these  banks  and 
trust  companies  lending  money  on  instructions  from  the 
out-of-town  banks  and  holding  as  custodians  for  account 
of  these  banks  the  securities  deposited  as  collateral  for  the 
loans  made. 

This  practice  grew  up  several  years  ago  as  a  result  of  the 
desire  of  out-of-town  banks  to  get  the  benefit  of  the  high 
call-money  rates  ruling  at  the  Exchange.  Instead  of  leav- 
ing their  money  on  deposit  with  the  New  Yfork  insti- 
tutions, allowing  the  latter  to  lend  this  money  for  their  own 
account,  the  out-of-town  banks  concluded  to  make  direct 
loans  themselves.  In  these  cases  the  New  York  institution 
acted  simply  as  agent  under  instructions,  having  no  control 
over  the  loans  made  and  being  simply  the  temporary  de- 
positary of  collateral.  This  practice  first  attracted  atten- 
tion as  a  dangerous  element  in  the  situation  in  the  summer 
of  1902.  At  that  time  a  quiet  investigation  developed  the 
fact  that  something  over  one  hundred  million  dollars  was 
being  lent  in  this  way  by  out-of-town  institutions,  subject  to 
the  call  of  those  institutions.  It  was  a  time  of  consider- 
able stringency  in  the  money  market,  and  New  York 
bankers  felt  that  the  existence  of  a  mass  of  credit  of  these 
dimensions  not  subject  to  control  had  within  it  the  po- 
tency of  disaster.  These  loans  do  not  figure  in  the  weekly 
bank  statement  and,  of  course,  are  supported  by  the  New 
York  cash  reserve.     It  is  not  generally  known  that  a  year 


STOCK   EXCHANGE   AND    MONEY   MARKET        37 

ago  the  same  condition  existed,  but  to  a  much  greater  ex- 
tent. In  December  of  last  year  it  was  estimated  that  over 
four  hundred  million  dollars  of  money  were  being  loaned 
in  New  York  City  for  account  of  country  institutions,  over 
which  loans  the  New  York  banks  had  no  control  whatever. 
In  view  of  what  has  happened  in  the  last  three  months  we 
may  be  truly  grateful  that  the  storm  did  not  break  as  it 
might  have  broken  twelve  months  ago,  instead  of  coming, 
as  it  did,  after  many  months  of  very  severe  liquidation, 
during  which  these  direct  loans  by  country  banks  were 
enormously  reduced. 

We  may  summarize,  therefore,  the  factors  which  com- 
bine to  make  the  call-loan  market  a  very  unstable  thing  in 
the  matter  of  rates  as  follows  :  First,  the  fluctuations  caused 
in  the  volume  of  credit  naturally  offered  at  call  by  the  sea- 
sonal ebb  and  flow  of  cash  in  connection  with  agricultural 
needs.  Second,  the  lack  of  unity  of  action  on  the  part  of 
lenders  generally.  Third,  the  intervention  of  outside  lend- 
ers acting  independently  of  the  local  banks ;  and  fourth, 
the  fact  that  the  call-loan  market  is  really  the  storage  place 
for  the  nation's  surplus  credit,  and  consequently  has  to 
take  up  all  the  stress  resulting  from  changes  of  stress  at 
other  parts  of  the  credit  system.  To  these  factors  we 
must  add  another  most  powerful  factor  at  times,  and  that 
is  speculation  in  the  stock  market.  We  have  already  noted 
the  fact  that  according  as  securities  more  clearly  demon- 
strate the  stability  of  their  values  they  tend  to  pass  out  of 
the  floating  mass  of  securities  into  the  hands  of  investors. 
It  is  necessary  now  to  note  certain  other  general  truths  with 
respect  to  consumption  of  securities  by  investors.  The  first 
is  that  every  panic  or  every  severe  decline  in  prices  brings 
investors  into  the  market  with  their  cash,  looking  for  bar- 
gains. This  year  has  furnished  a  very  notable  demonstra- 
tion of  this  fact,  for  "odd  lot"  buying  has  been  a  conspicu- 
ous feature  during  the  very  worst  times   of  the  panic. 


38  THE    CURRENCY   PROBLEM 

The  second  is  that  speculation  carried  to  unwise  extremes 
in  advancing  prices  has  a  precisely  contrary  effect,  tending 
to  attract  securities  from  investors'  hands  back  into  the 
floating  mass  whence  they  were  taken  by  those  investors. 
Remembering  that  investors'  purchases,  by  taking  securi- 
ties away  from  Wall  Street,  enable  repayment  of  money 
borrowed  on  those  securities,  and  conversely  that  investors' 
sales  force  increased  borrowing  by  Wall  Street,  it  is  clear 
that  here  is  one  reason  why  speculation  when  it  becomes 
active  tends  to  absorb  more  money  in  security  loans.  An- 
other reason  —  fully  as  potent  —  is  that  in  a  period  of  ac- 
tive speculation  there  is  much  shifting  of  loans,  and  in  a 
period  of  rising  prices  every  time  a  loan  is  shifted  it  means 
the  borrowing  of  more  money  on  the  same  securities,  for 
rising  prices  mean  more  security  in  the  same  certificate  or 
bond.  Thus,  speculation  in  securities  tends  to  attract 
securities  to  "Wall  Street"  to  begin  with  and  causes,  in 
addition,  the  same  securities  continually  to  absorb  more 
credit,  which,  of  course,  has  a  powerful  effect  upon  call- 
money  rates. 

Conversely,  a  period  of  liquidation  in  securities,  such  as 
we  have  had  this  summer  and  fall,  tends  to  attract  investors 
and,  in  addition,  by  lowering  prices,  to  relieve  a  certain 
amount  of  credit  on  the  shifting  of  loans  —  the  whole 
tending  to  lessen  the  strain  on  the  call-money  market,  other 
things,  of  course,  being  assumed  to  be  equal. 

Viewing  the  whole  matter  generally,  so  far  as  the  call- 
money  market  is  concerned,  it  is  not  difficult  to  under- 
stand why  it  tends  to  swing  constantly  to  one  or  to  the 
other  extreme,  namely,  pronounced  ease  or  downright 
stringency.  It  is  a  curious  fact,  proved  by  experience, 
that  there  is  practically  no  middle  course  for  it.  Rates 
are  either  down  to  two  per  cent  or  thereabouts  or  twenty 
per  cent  and  upwards.  Rates  on  call  loans  rarely  remain 
for  any  length  of  time  around  four  to  six  per  cent.     They 


STOCK  EXCHANGE  AND  MONEY  MARKET   39 

either  quickly  fall  away  or  quickly  rise  above  these  figures ; 
it  is  usually  a  feast  or  a  famine  for  the  borrower.  The 
fundamental  reason  is,  as  we  have  seen,  the  fact  that  the 
New  York  money  call-loan  market  is  the  essentially  mobile 
surplus  portion  of  the  nation's  banking  credit,  whose  volume 
is  relatively  small  in  comparison  to  the  total  mass  and  upon 
which  very  powerful  strains  are  exerted,  most  of  the  time, 
in  either  direction. 

What  general  judgment  are  we  to  pass  upon  this  system 
of  call  loans  and  its  bearing  upon  the  business  community 
at  large  ?     Is  it  on  the  whole  a  good  system  ? 

I  shall  not  venture  to  urge  upon  you  any  opinion  of  my 
own,  but  will  ask  you  to  note  certain  plain  facts.  The  first 
is  that  its  very  existence  depends  upon  the  system  of  daily 
settlements  of  the  New  York  Stock  Exchange,  without 
which  no  call-loan  market  would  be  either  necessary  or  pos- 
sible. The  second  is  that  both  in  the  case  of  security 
prices  on  the  Stock  Exchange  and  in  the  case  of  call-loan 
rates,  this  daily  settlement  system  tends  to  make  fluctua- 
tions more  violent  than  otherwise  might  be  the  case.  The 
third  is  that  the  wide  attention  necessarily  attracted  by 
violently  fluctuating  call-money  rates  must,  to  a  consid- 
erable extent,  influence  money  rates  generally,  not  merely 
as  regards  time  loans  or  securities,  but  also  as  regards 
commercial  paper.  For  in  the  making  of  rates  on  money 
loans  sentiment  is  a  most  powerful  factor,  and  sentiment 
is  necessarily  very  sensitive  to  violent  changes  in  call 
money. 

On  the  other  hand,  there  can  be  no  doubt  that  the  system 
of  daily  settlements  on  the  Stock  Exchange  is  a  great  re- 
straining influence  upon  reckless  gambling,  beyond  the 
means  of  either  the  speculator  or  his  broker,  which  in  a 
country  like  this,  where  speculation  is  so  powerful  a  factor 
in  enterprise  generally,  is  no  small  benefit. 

The  main  thing  that  seems  to  be  needed  is  some  stabilizing 


40  THE   CURRENCY   PROBLEM 

force  in  the  call-money  market,  and,  if  I  may  be  permitted 
the  suggestion,  it  might  be  possible  to  find  this  force  in  some 
method  of  concerted  action  by  lenders  of  money  in  which 
the  bankers'  clearing-house  might  play  a  part.  I  am  not 
prepared  with  a  plan  and  shall  not  presume  to  make  sug- 
gestions as  to  details,  but  there  does  not  seem  to  me  to  be 
any  fundamental  difficulty  in  adjusting  the  daily  supplies 
of  call  money  to  the  daily  needs  without  unrestricted  com- 
petition on  both  sides,  and  without  wild  fluctuations  in 
money  rates,  which  are  a  perennial  source  of  amazement, 
and,  I  fear,  contempt,  to  our  foreign  banking  friends. 


GOVERNMENT   CURRENCY 

vs. 

BANK   CURRENCY 

BY 

A.   BARTON   HEPBURN 


GOVERNMENT   CURRENCY   VS.  BANK 
CURRENCY 

I.   The  Subtreasury 

No  discussion  of  the  currency  question  in  this  country 
will  be  complete  or  well  understood,  unless  it  be  considered 
with  reference  to  our  subtreasury  system,  which  exercises 
a  most  important  influence  upon  our  affairs.  The  charter 
of  the  second  United  States  Bank  expired  in  1836,  following 
the  memorable  controversy  with  President  Jackson.  Pub- 
lic sentiment  in  opposition  to  the  bank  was  roused  almost 
to  the  point  of  virulence  and  so  continued  for  several  years. 
This  bank,  during  its  existence,  was  the  most  important 
supporter  as  well  as  regulator  of  commerce.  With  it 
eliminated,  the  country  was  largely  dependent  upon  state 
banks  for  its  circulating  medium,  specie  performing  a 
minor  part  of  the  currency  functions  of  the  time.  State 
banks  were  extended  both  as  to  credit  and  as  to  currency 
far  beyond  the  danger  point  and  failed  utterly  to  command 
public  confidence.  Another  United  States  Bank  was  de- 
manded. Harrison,  committed  to  the  establishment  of 
such  a  bank,  was  elected  President  with  a  friendly  Congress. 
Death  soon  followed  his  inauguration,  and  Tyler,  who 
succeeded  him,  vetoed  two  successive  measures  providing 
for  such  a  bank,  upon  hair-splitting  constitutional  grounds. 
This  was  a  period  of  enormous  expansion  of  credit  as 
well  as  of  note  issues  by  the  state  banks,  and  general  dis- 
trust of  their  condition  drove  Congress,  in  1846,  to  the 
establishment  of  the  subtreasury  system.  Its  establish- 
ment at  that  time  and  under  those  circumstances,  two 
bank  measures  having  failed,  was  undoubtedly  justified, 

43 


44  THE   CURRENCY   PROBLEM 

but  its  retention  at  the  present  time  is  inexplicable.  The 
depositing  of  public  money  in  banks,  or  the  disposition  of 
them  in  any  manner  other  than  in  payment  of  treasury 
drafts  or  transfer  orders,  was  prohibited.  After  January 
1,  1847,  revenues  were  all  to  be  paid  in  specie  or  treasury 
notes,  and  the  officers  of  the  government  were  required  to 
hold  them  safely.  Because  very  little  revenue  was  re- 
ceived at  Washington,  where  the  Treasury  is  situated,  sub- 
treasuries  were  located  in  the  important  cities  of  the  coun- 
try, for  the  purpose  of  facilitating  the  collection  and  for  the 
safe-keeping  of  the  revenue,  and  hence  the  existence  of 
what  is  popularly  known  as  the  subtreasury  system.  It 
was  and  is  a  safety  deposit  system.  Whenever  the  govern- 
ment's receipts  exceed  its  payments,  it  draws  into  the 
Treasury  and  locks  up  money  that  should  be  left  in 
circulation  at  the  service  of  commerce.  This  tends  to 
produce  a  stringency  in  the  money  market,  to  raise  the 
rates  of  interest,  and  to  reduce  the  value  of  property. 

Suppose  that  the  various  states,  counties,  cities,  towns, 
and  villages,  as  their  taxes  or  revenues  were  received,  should 
lock  them  up,  only  to  be  paid  out  in  meeting  their  expen- 
ditures —  under  such  conditions,  how  much  currency 
would  it  require  to  transact  the  business  of  the  country  ? 
This  is  not  a  banking  system,  it  is  the  system  of  the 
safety-deposit  vault,  or  the  stocking  of  the  ignorant  or 
suspicious  citizen,  who  needs  must  have  within  his  own 
grasp  the  actual  money,  who  has  no  faith  in  credit,  and  who 
refuses  to  contribute  anything  to  maintaining  the  affairs 
of  a  business  world,  carried  on  and  enlarged  by  instru- 
ments of  credit.  As  early  as  1853-1854,  the  accumulation 
of  funds  in  the  Treasury  produced  such  distress  in  the 
country  that  Secretary  Guthrie,  in  order  to  relieve  the 
situation,  purchased  government  bonds  at  a  very  great 
premium,  thereby  restoring  money  to  the  channels  of  trade. 
From   that  time   until   now,   successive   secretaries   have 


GOVERNMENT  CURRENCY  VS.   BANK  CURRENCY  45 

largely  nullified  the  subtreasury  law  by  buying  bonds  and 
since  1864  by  depositing  money,  which  the  law  of  that  date 
permitted,  with  national  banks.  Such  a  law  and  such  a 
system  of  locking  up  funds  makes  the  government  a  part- 
ner in  every  man's  business.  Merchants,  manufacturers, 
financiers,  must  study  the  various  conditions  at  home  and 
abroad  to  determine  their  business  hazard,  but  before  act- 
ing they  must  consider  the  personal  idiosyncrasies  of  the 
secretary  and  gauge,  as  nearly  as  may  be,  his  probable  ac- 
tion —  whether  he  will  permit  money  to  accumulate  and 
money  rates  to  advance,  or  whether  he  will  adopt  a  course 
tending  to  prevent  these  results. 

Commerce  should  be  free  and  untrammeled  so  far  as 
may  be,  and  the  business  interests  of  the  country  should  be 
relieved  of  the  "steady-by-jerks"  method  of  overcoming 
the  money-hoarding  tendencies  which  the  subtreasury 
system  renders  inevitable. 

II.   Private  vs.  Public  Enterprise 

Experience  has  shown  that  private  enterprise,  within 
its  proper  sphere,  is  more  efficacious  and  calculated  to  pro- 
duce better  results  than  public  enterprise  —  that  is  to  say, 
than  governmental  adventure. 

The  ranee  of  ambition  and  the  stimulus  to  exertion  are 
much  greater  in  private  than  in  public  life ;  one's  standing 
in  the  estimation  of  his  fellows  is  very  largely  determined 
by  his  measure  of  success  in  whatever  vocation  may  com- 
mand his  efforts.  Success  in  life,  in  its  better  sense,  plus 
success  in  life  in  a  business  sense,  seems  to  attend  in  greater 
degree  upon  private  rather  than  public  enterprise.  For 
this  reason  matters  of  fundamental  importance  are  en- 
trusted to  private  interests  under  government  control. 
The  highways  and  byways  and  routes  of  trade  and  the 
transmission  of  intelligence  by  mail  or  otherwise  are 
a  governmental  responsibility.     Such  responsibility  is  in 


46  THE   CURRENCY   PROBLEM 

large  measure  delegated  to  municipal  divisions  of  the  state, 
as  well  as  to  corporate  enterprise. 

Money,  that  is  money  of  ultimate  redemption,  is  and 
should  be  issued  by  the  government  only.  Such  money 
constitutes  the  standard  of  value  by  which  all  property, 
all  labor,  all  effort,  is  measured.  The  aim  of  the  govern- 
ment is  to  have  the  intrinsic  value,  or  better,  the  market 
value,  equal  the  coin  value  of  its  money  as  nearly  as  may 
be.  Where  free  coinage  exists,  the  coin  value  and  the  bul- 
lion value  naturally  differ  only  by  the  cost  and  regula- 
tion of  coinage.  This  is  true  at  the  present  time  of  gold, 
as  to  which  free  coinage  exists  generally  throughout  the 
world.  Not  so,  however,  with  silver.  The  bullion  value 
of  silver  is  about  one-half  the  coin  value.  Silver  coin 
circulates  on  a  par  with  gold  in  the  United  States  because 
the  government  guarantees  such  parity,  the  government's 
credit  thus  offsetting  the  deficiency  in  value. 

The  power  and  responsibility  of  the  government  in 
respect  to  currency  are,  in  part,  delegated  to  private  enter- 
prises, by  empowering  banks  to  issue  their  notes  to  circu- 
late and  perform  the  office  of  money. 

The  stock  of  money  in  the  country,  January  1,  1908, 
was  as  follows  :  — 

Gold  (including  bullion  in  the  Treasury)  — unlimited 
legal  tender,  $1,604,530,493. 

Silver  dollars  — unlimited  legal  tender,  except  where 
otherwise  expressed  in  the  contract,  $562,770,982. 

United  States  notes,  commonly  called  "greenbacks," 
issued  during  the  Civil  War  — legal  tender  for  all  debts, 
public  and  private,  except  duties  on  imports  and  interest 
on  the  public  debt, —$346,681,016. 

United  States  notes,  issued  for  the  purchase  of  silver 
bullion  (law  of  1890)  — legal  tender  at  face  value  in  pay- 
ment of  all  debts,  public  or  private,  except  when  otherwise 
expressly  stipulated  in  the  contract,  $5,479,000. 


GOVERNMENT  CURRENCY  VS.   BANK  CURRENCY  47 

Subsidiary,  or  fractional  silver  — legal  tender  up  to 
ten  dollars,  — $139,630,994. 

Nickels  and  pennies  — legal  tender  up  to  twenty-five 
cents,  $1,159,205.72. 

National  bank-notes,  $690,130,895. 

Circulating  notes  are  issued  by  the  government  to  na- 
tional banks  applying,  upon  a  deposit  of  government  bonds 
to  secure  their  redemption.  The  banks  are  also  required 
to  maintain  a  redemption  fund  with  the  Treasury  at  Wash- 
ington, equal  to  five  per  cent  of  their  outstanding  circu- 
lation, which  notes  bear  upon  their  back  the  following : 
"This  note  is  receivable  at  par  in  all  parts  of  the  United 
States  in  payment  of  all  taxes  and  excise  and  all  other  dues 
to  the  United  States,  except  duties  on  imports,  and  also 
for  all  salaries  and  other  debts  and  demands  owing  by  the 
United  States  to  individuals,  corporations,  or  associations 
within  the  United  States,  except  interest  on  the  public 
debt." 

The  government  is  bound  to  redeem  these  notes  upon 
presentation,  protected  in  turn  by  bonds  and  a  deposit 
fund.  Any  national  bank  is  obliged  to  receive  at  par  the 
note  of  any  other  national  bank  in  payment  of  any  obliga- 
tion owing  to  it.  It  therefore  appears  that  these  bank-notes 
possess  legal-tender  qualities,  are  virtually  an  obligation  of 
the  government,  and  lack  the  essential  characteristics  of  a 
bank-note  as  the  same  is  generally  understood  and  gener- 
ally in  use  in  other  countries. 

The  people  of  this  country  do  not  like  metallic  currency, 
and  barring  subsidiary  coins,  very  little  hard  money  is 
used  in  current  affairs.  More  than  four-fifths  of  all  the 
silver  dollars  in  existence  are  lodged  in  the  Treasury  of  the 
United  States  and  are  represented  by  silver  certificates  in 
circulation,  the  amount  being  $467,731,347.  These  cer- 
tificates recite  on  their  face  :  "This  certifies  that  there  have 
been  deposited  in  the  Treasury  of  the  United  States  of 


48  THE   CURRENCY   PROBLEM 

America  —  silver  dollars  payable  to  the  bearer  on  de- 
mand." On  the  back  of  the  note  are  found  the  words : 
"This  certificate  is  receivable  for  customs,  taxes  and  all 
public  dues,  and  when  so  received  may  be  reissued." 
Silver  certificates  are  issued  in  denominations  of  $1,  $2, 
$5,  and  $10. 

Gold  certificates  possess  the  same  money  function  as 
silver  certificates,  are  issued  in  denominations  ranging 
from  $10  to  $10,000,  and  amount  to  $706,612,349. 

The  grand  total  of  money  in  the  country,  January  1, 
1908,  amounts  to  $3,349,223,380;  excluding  the  amount 
in  the  United  States  Treasury,  we  have  in  actual  circula- 
tion $3,078,989,298,  which  equals  $35.48  per  capita. 

During  the  recent  silver  propaganda,  when  the  govern- 
ment was  buying  silver  bullion  monthly  in  the  market  and 
coining  it  into  silver  money,  and  later  purchasing  bullion 
and  issuing  legal-tender  notes  in  payment  therefor,  we 
were  very  nearly  forced  upon  a  silver  basis,  because  of  the 
volume  of  our  silver  currency.  The  policy  of  the  govern- 
ment in  this  respect  finally  changed,  and  in  order  to 
afford  protection  in  the  future,  Congress  has  limited  the 
denominations  of  silver  certificates  to  $1,  $2,  $5,  and  $10, 
thereby  seeking  to  chain  their  use  to  everyday  industry  and 
to  prevent  their  return  to  the  Treasury  in  sufficient  volume 
to  disturb  the  relationship  between  the  two  metals.  With 
the  same  end  in  view,  Congress  also  forbade  national  banks 
from  issuing  notes  in  smaller  denominations  than  $5,  and 
permits  only  a  portion  of  their  issue  to  be  in  that  denomi- 
nation. The  government  does  not  redeem  silver  certifi- 
cates in  gold  at  the  Treasury,  nor  does  it  exchange  gold 
for  silver,  but  it  does  redeem  silver  and  silver  certificates 
by  receiving  them  for  customs,  taxes,  and  all  public  dues. 

Every  source  of  revenue  which  the  government  possesses 
may  be  paid  in  silver,  and  should  the  parity  with  gold  be 
disturbed,  the  entire  revenue  would  be  received  in  silver. 


GOVERNMENT  CURRENCY  VS.   BANK  CURRENCY  49 

In  effect,  then,  the  government  does  redeem  its  silver  money 
in  gold  and  must  do  so  under  existing  law,  so  long  as  the 
parity  is  maintained  between  the  two  metals,  and  the 
maintenance  of  such  parity  is  the  settled  policy  of  the  gov- 
ernment. The  law  provides  a  gold  reserve  fund  of 
one  hundred  and  fifty  millions,  directs  the  secretary  to 
maintain  the  same,  and  gives  him  unlimited  power  to  issue 
and  sell  government  bonds  for  that  purpose. 

Joseph's  coat  had  many  colors,  and  yet  I  have  never 
heard  it  claimed  that  it  was  not  a  good  coat.  It  screened 
his  person,  thus  satisfying  the  tenets  of  modesty;  it  pro- 
tected him  against  inclement  weather,  and  thus  preserved 
his  physical  well-being;  even  though  it  provoked  the 
criticism  of  his  neighbors  and  their  descendants  down  to 
the  present  time. 

Our  currency  system  possesses  many  varying  qualities, 
if  not  hues,  but  it  is  good  beyond  peradventure.  It  is  not 
scientific ;  it  ought  to  be  unified  and  rendered  homogene- 
ous. It  does  not  represent  a  carefully  devised  system, 
for  our  people  as  yet  will  not  follow  expert  opinion  in  mat- 
ters of  legislation.  It  has  many  variations  in  debt-paying 
power,  every  phase  representing  the  result  of  an  earnest 
conflict  between  contending  interests,  yet  it  is  all  good; 
for  all  the  currency  which  requires  redemption  is  certain 
to  be  replaced  upon  demand  by  money  of  final  payment. 
Briefly,  then,  this  is  the  money  provided  to  meet  the  retail 
necessities  of  our  domestic  livelihood  and  the  broader  re- 
quirements of  home  and  foreign  commerce,  as  well  as  the 
revenues  of  the  nation. 

Each  different  kind  of  currency  possesses,  in  different 
degrees  or  respects,  a  legal-tender  power.  "  Legal  tender," 
with  respect  to  currency,  means  that  a  debtor  may  legally 
tender  such  currency  to  his  creditor  in  payment  of  the  debt ; 
and  the  creditor  is  bound  to  accept  the  same,  and  may  be 
held  to  such  obligation  in  the  courts.     Any  form  of  cur- 


50  THE   CURRENCY   PROBLEM 

rency  that  has  the  power  of  extinguishing  a  debt  (legal- 
tender  power)  ought  to  be  money.  This,  unfortunately, 
is  not  true  as  to  United  States  currency,  if  we  give  the  word 
"money"  the  meaning  which  economists  give,  and  which 
is  adopted  by  the  leading  commercial  nations. 

The  fiat  of  the  government  gives  the  currency  its  legal- 
tender  power;  the  government's  mandate  compels  its 
acceptance  under  certain  circumstances  and  for  certain 
purposes.  Gold  coin,  which  is  legal-tender  money  in 
this  country,  is  simply  merchandise  in  Great  Britain. 

As  we  have  seen,  the  government  itself  is  bound  to  re- 
deem these  various  forms  of  paper  currency  in  a  manner 
which  amounts  practically  to  a  redemption  in  gold. 
This  makes  it  all  the  more  difficult  to  understand  why 
Congress  neglects  to  systematize  and  to  unify  the  same. 

I  have  entered  into  much  detail  in  order  to  show  that 
all  the  currency  in  the  United  States  is  governmental  cur- 
rency. What  is  generally  understood  as  bank-note  cur- 
rency does  not  exist  in  the  United  States.  A  bank-note 
is  issued  in  a  form  with  which  you  are  all  familiar,  conven- 
ient for  passage  from  hand  to  hand,  and  recites  that  the 

bank  issuing  the  same  will  pay  the  bearer  $ on 

demand.  It  is  the  bank's  I.  O.  U.  It  is  not  money,  and 
any  one  may  refuse  to  receive  the  same.  It  is,  as  it  recites 
on  its  face,  a  demand  obligation,  and  in  this  respect  bank- 
notes are  the  same  as  a  bank's  deposits,  which  are  also 
demand  obligations.  A  bank's  deposits  are  valued  against 
by  checks  and  drafts,  which  pass  by  indorsement,  and  such 
obligations  constitute  ninety  per  cent  of  our  domestic 
exchange.  Ninety  per  cent  of  the  business  of  the  country 
is  done  with  checks  and  drafts.  When  a  business  man 
has  no  use  for  his  money,  he  deposits  it  in  his  bank ;  when 
he  has  use  for  it,  he  withdraws  the  same  and  perhaps 
borrows  from  the  bank  in  order  to  supply  additional 
needs. 


GOVERNMENT  CURRENCY  VS.   BANK  CURRENCY  51 

A  bank's  deposit  liabilities  fluctuate  in  amount  as  its 
customers  increase  or  reduce  their  balances,  and  such  in- 
crease or  reduction  of  course  corresponds  to  the  varying 
conditions  of  business. 

An  increase  in  a  bank's  deposits  is  regarded  as  evidence 
of  public  confidence  and  increased  banking  power ;  whereas 
an  increase  in  a  bank's  note  obligations,  which  are  pre- 
cisely of  the  same  general  nature  and  character,  is  looked 
upon  by  some  people  with  misgiving,  as  though  possessing 
possible  danger.  Why  danger? — for,  for  every  bank- 
note issued,  some  good  asset,  presumably  the  promissory 
note  of  a  solvent  customer,  goes  into  the  assets  of  the 
bank,  thereby  offsetting  its  note  liability. 

III.    Bank-notes 

There  are  two  theories  in  respect  to  bank-note  issues 
—  the  "currency  principle"  and  the  "banking  principle." 
The  "currency  principle"  is  illustrated  by  the  law  govern- 
ing the  Bank  of  England.  Beyond  a  moderate  fixed 
amount  it  can  issue  notes  only  in  exchange  for  gold  coin 
or  bullion,  and  the  theory  is  that  a  paper  currency  possesses 
practically  the  same  characteristics  as  actual  money  and 
should  be  subject  to  the  same  regulations  as  to  volume 
and  in  other  respects  generally. 

The  "banking  principle,"  which  appears  to  me  to  be 
the  correct  principle,  is  that  bank-notes  should  represent 
the  credit  of  the  bank,  that  they  should  be  issued  against 
the  assets  of  the  bank,  and  that  the  volume  thereof  should 
be  regulated  by  the  credit  needs  of  the  bank's  constituency. 
A  bank  located  in  the  cotton  belt,  while  the  cotton  crop 
was  being  made  and  marketed,  would  be  gradually  ex- 
panding its  note  issue,  and  as  returns  from  the  marketed 
crop  were  received  and  the  notes  of  its  customers  paid,  its 
own  notes  issued  would  come  in  for  redemption.  Thus  the 
maximum  and  the  minimum  amounts  of  a  bank's  note  issue 


52  THE    CURRENCY   PROBLEM 

would  be  determined  by  the  commercial  demands  which  it 
serves,  in  the  same  manner  as  the  volume  of  its  loans  and 
deposits  is  determined. 

The  first  essential  of  an  efficient  bank-note  issue  is 
safety.  A  bond-secured  currency  may  lay  claim  to  safety, 
but  is  in  violation  of  every  principle  of  commercial  bank- 
ing. The  object  of  allowing  a  bank  to  issue  its  notes  is 
not  to  enable  it  to  make  money,  but  to  enable  it  better  to 
serve  the  public.  If  the  bond  security  is  good  and  ade- 
quate, a  bank  must  invest  more  money  in  its  bond  security 
than  it  is  permitted  to  issue  in  notes.  To  illustrate :  A 
national  bank  may  buy  $100,000  United  States  two-per-cent 
bonds,  costing  $105,000,  and  by  depositing  such  bonds 
with  the  Treasury,  it  is  permitted  to  issue  $100,000  in 
notes.  It  has  paid  out  $105,000  and  may  issue  $100,000 
in  notes.  Whatever  the  profit  of  the  transaction  may  be, 
the  bank  has  locked  up  $5000  of  its  own  money  by  the 
transaction,  and  has  to  that  extent  diminished  its  power 
to  serve  the  public. 

The  utter  failure  of  our  bond-secured  currency  to  re- 
spond to  or  to  serve  the  needs  of  commerce  is  poignantly 
illustrated  by  the  events  of  the  crisis  through  which  we 
are  now  passing.  The  government,  though  not  in  need 
of  funds,  has  just  made  an  issue  of  Panama  bonds,  in  order 
that  the  banks  might  buy  them  as  a  basis  for  circulation. 
It  also  offered  a  $100,000,000  issue  of  one-year  certificates 
of  indebtedness,  drawing  interest  at  three  per  cent,  printed 
in  the  form  and  size  of  bank-notes,  in  order  that  they  might 
serve  as  currency  and  also  as  a  basis  of  bank-note  circula- 
tion. At  the  same  time  the  Treasury  had  over  $200,000,000 
in  excess  of  its  working  balance.  Was  there  ever  a  parallel 
in  governmental  financiering?  Borrowing  money  which 
it  did  not  need,  and  paying  interest  which  might  and 
should  have  been  avoided,  in  order  to  create  a  condition 
which  would  permit  the  creation  of  more  bank-notes  — 


GOVERNMENT  CURRENCY  VS.   BANK  CURRENCY  53 

notes,  bond  secured  and  government  guaranteed  — which 
were  quite  as  likely  to  go  into  hoarding  as  into  circulation 
when  issued ! 

Our  government,  sorely  pressed  for  funds  to  finance  the 
Civil  War,  created  the  national  bank  system  with  a  bond- 
secured  currency,  in  order  to  make  a  market  for  its  bonds. 
It  imposed  a  ten  per  cent  tax  on  state  bank  circulation  in 
order  to  force  it  out  of  existence  and  at  the  same  time  to 
force  the  state  banks  into  the  national  system.  The 
needs  of  that  period  were  well  served,  no  doubt ;  but  the 
same  laws  continuing  at  the  present  time  hold  commerce 
in  a  strait-jacket,  to  the  infinite  loss  of  all. 

A  study  of  the  several  financial  crises  since  the  Civil 
War  will  compel  any  student  to  condemn  a  bond-secured 
currency  as  wholly  inadequate  to  the  needs  of  a  commercial 
nation. 

If  not  secured  by  bonds,  how  shall  safety  be  guaranteed  ? 
An  annual  tax  of  one-fourth  of  one  per  cent  levied  upon  the 
outstanding  circulation  of  the  national  bank  system  would 
have  raised  a  sum  more  than  sufficient  to  redeem  the  notes 
of  every  bank  that  has  failed,  and  that  without  recourse  to 
the  bonds  held  as  security.  A  careful  study  of  the  na- 
tional system  during  the  forty-three  years  of  its  existence 
will  leave  no  doubt  in  the  minds  of  candid  men  that  a 
moderate  annual  tax  upon  circulation  would  produce  a 
fund  ample  for  its  protection  and  redemption. 

Life  insurance  is  predicated  upon  mortality  tables 
gleaned  from  vital  statistics  of  the  human  race,  and  such 
business  is  conducted  with  safety  and  in  enormous  volume. 
Fire  insurance  is  predicated  upon  the  destruction  of  prop- 
erty by  fire  over  a  period  of  years,  and  the  amount  of  pre- 
mium necessary  to  cover  the  risk  ascertained  with  reason- 
able certainty.  How  much  easier  and  with  how  much 
greater  certainty  is  the  mortality  or  longevity  of  banks 
ascertained.     With   more   than   forty   years   of   complete 


54  THE    CURRENCY   PROBLEM 

statistical  history  of  the  national  banking  system  before  us, 
we  are  justified  in  assuming  that  a  moderate  guarantee  or 
safety  fund  is  quite  sufficient  to  protect  a  credit  currency 
and  to  insure  the  redemption  of  any  bank-notes  that  may 
be  in  default. 

The  experience  of  other  nations,  as  well  as  the  ante- 
bellum experience  of  many  of  our  states,  furnishes  histori- 
cal evidence  that  the  safety-fund  principle  will  afford  pro- 
tection and  insure  redemption  without  imposing  a  burden 
upon  the  resources  of  a  bank  such  as  the  purchase  of  bonds 
involves.  It  gives  to  the  currency  safety  and  to  the  bank 
greater  power  to  serve  the  public.  Such  notes  should  be 
a  lien  upon  all  the  assets  of  the  bank  and  not  upon  any 
segregated  portion  —  a  first  lien,  if  you  please. 

The  government  that  holds  the  redemption  fund  should 
redeem  the  notes  of  failed  banks  upon  presentation,  and 
would  thereby,  by  subrogation,  become  possessed  of  a 
note-holder's  claim  or  lien  against  the  assets  of  the  failed 
bank.  Such  provisions  would  protect  all  against  loss  on 
account  of  the  notes  of  failed  banks.  The  redemption 
of  the  notes  of  going  banks  should  be  insured  by  a  gold 
reserve  of  not  less  than  twenty-five  per  cent.  Thus  for- 
tified and  protected,  we  may  with  business  certainty  con- 
clude that  such  a  note  issue  would  be  safe  as  well  as 
efficient. 

IV.    Redemption 

Its  redemption  should  be  sure  and  prompt  and  made  at 
the  expense  of  the  bank  of  issue.  So  much  is  due  to  the 
public  who  are  asked  to  make  use  of  the  bank-notes. 
Redemption  of  this  character  is  also  imperative  in  order 
to  insure  elasticity,  for  retirement  when  the  demand  for 
its  use  slackens  is  an  essential  of  elasticity.  If  currency 
is  to  circulate  throughout  the  country,  the  redemption  fa- 
cilities must  follow  in  its  wake,  in  order  that  lawful  money 


GOVERNMENT  CURRENCY  VS.   BANK  CURRENCY  55 

may  be  received  therefor  at  the  desire  of  the  holder,  and 
in   order  that  anything  approximating  inflation  may  be 
avoided.     Checks  and  drafts,  which  consummate  such  a 
large  percentage  of  our  business  transactions,   are  pos- 
sessed of  perfect  elasticity.     They  are  born  at  command 
and    are    extinguished    by    use.     The    Stock    Exchange, 
Produce  Exchange,  Cotton  Exchange,  all  the  exchanges 
dealing  in  commodities,  as  well  as  all  the  varied  interests 
of  any  considerable  magnitude  in  the  city  of  New  York, 
have    a    currency    of    their    own  — the    certified    check. 
Actual  money,   or  currency  in   any  form,   is   practically 
unknown  in  the  city  of  New  York  in  any  transaction  except 
of  a  retail  character.     The  bank  check  performs  the  func- 
tion   of    payment,   and  if   the  amount  reaches   into    the 
thousands,  the  check  is  certified.     It  is  a  perfect  currency, 
it  is  elastic,  responding  in  volume  to  any  demand;    it  is 
predicated  upon  the  credit  of  the  parties  to  the  transaction. 
Its  redemption  is  speedy  and  it  is  unvexed  by  arbitrary 
laws.     It  is  not  subject  to  governmental  interference.     It  is 
absolutely  responsive  to  the  demands  of  trade,  and  without 
it  the  commerce  of  that  great  city  would  be  impossible. 
Checks  and  drafts  cannot,  however,  serve  the  retail  cur- 
rency demands  of  a  community,  nor  are  they  available  for 
shipment  to  other  localities  in  order  to  settle  the  balance 
of  trade.     In  order,  therefore,  to  conserve  the  interests  of 
the  public,  banks  should  be  permitted,  within  certain  limi- 
tations with  respect  to  capital,  to  issue  circulating  notes. 
Such  notes  should  be  protected  by  a  lien  upon  the  general 
assets  of  the  bank,  should  be  further  protected  by  a  lawful 
money  reserve  of  not  less  than  twenty-five  per  cent,  and 
should,  finally,  be  protected  by  a  redemption  fund  in  the 
hands  of  the  government,  accumulated  and  kept  good  by 
means  of  an  annual  tax  levied  for  that  purpose.     They 
should  be  redeemable  over  a  bank's  counter,  at  the  United 
States  Treasury,  and  at  convenient  points  throughout  the 


56  THE    CURRENCY   PROBLEM 

country,  thereby  maintaining  the  notes  at  par  throughout 
the  country.  They  should  be  subject  to  a  moderate  tax, 
as  the  higher  the  tax  the  higher  the  rate  of  interest 
charged  the  public.  Such  a  currency  would  serve  the 
retail  demands  of  the  immediate  constituency  of  each 
bank.  Its  volume  would  respond  automatically  to  com- 
mercial demands.  The  small  banks  of  the  country 
would  first  feel  the  need  and  be  the  first  to  issue  notes, 
in  response  to  crop-making  and  crop-moving  demands. 
When  their  limit  of  issue  was  reached,  they  would,  as 
they  do  now  under  existing  conditions,  call  upon  the  reserve 
cities  for  funds.  This  would  enable  the  reserve  cities  to 
make  use  of  their  note  issue,  by  shipment  to  the  rural  dis- 
tricts. Their  limit  reached,  the  reserve  cities  would  in 
turn  call  upon  the  central  reserve  cities,  and  in  such  a 
condition,  New  York,  for  instance,  could  issue  and  ship  its 
circulating  notes  to  the  interior.  Under  no  other  condi- 
tions could  they  be  made  use  of  by  the  city  of  New  York, 
except  in  supplying  the  local  currency  demands  in  our 
everyday  transactions.  This  would  enable  the  money  cen- 
ters to  retain  their  reserve  money,  at  the  same  time  supply- 
ing the  crop-moving  and  other  commercial  demands  of  the 
interior.  It  would  make  the  rural  portion  of  our  country 
less  dependent  upon  the  cities;  it  would  relieve  the  cities 
of  the  congestion  of  money  in  the  duller  portion  of  the  year 
and  also  relieve  them  from  the  severe  demands  that  char- 
acterize the  periods  of  greatest  business  activity.  It  would 
tend  to  stability  and  uniformity  in  the  rates  of  interest. 
It  would  give  to  business  affairs  a  greater  degree  of  cer- 
tainty, which  is  a  cardinal  need  in  all  commercial  trans- 
actions. 

It  would  be  well,  also,  to  permit  the  issue  of  an  addi- 
tional amount  of  currency,  subject  to  a  very  high  tax, 
that  might  be  availed  of  in  just  such  a  crisis  as  the  one 
through  which  we  are  at  present  passing. 


GOVERNMENT  CURRENCY  VS.   BANK  CURRENCY  57 

Such  a  credit  currency  system  could  be  well  and  success- 
fully applied  to  our  existing  banking  system,  and  in  this 
connection  I  commend  the  plan  devised  by  a  commission 
created  by  the  American  Bankers'  Association  and  in- 
dorsed by  that  association  at  their  annual  convention  held 
at  Atlantic  City  last  fall. 

While  I  believe  that  such  a  currency  can  be  successfully 
applied  to  the  sixty-five  hundred  banks  now  in  existence, 
yet  judged  from  an  historical  and  scientific  standpoint, 
the  currency  system  of  a  country  can  best  be  admin- 
istered through  the  instrumentality  of  a  central  bank  of 
issue.  England  proved  this  and  created  a  central  bank 
of  issue  and  provided  that  the  note-issuing  privilege  then 
possessed  by  existing  banks  should  revert  to  this  central 
bank  of  issue  whenever  for  any  cause  the  various  banks 
should  surrender  or  forfeit  the  same.  United  Germany 
taught  us  the  same  lesson,  closely  following  the  example  of 
England,  but  greatly  improving  upon  the  English  system 
in  respect  to  elasticity  and  ability  to  serve  commercial 
interests.  Yet  in  this  country  the  manifest  advantages  of 
a  central  bank  of  issue  are  brushed  aside  on  the  assump- 
tion that  public  sentiment  will  not  tolerate  it.  Public 
sentiment  changes  with  great  rapidity  and  has  undergone, 
and  is  undergoing,  pronounced  change  in  the  matter  of 
centralization  of  power  and  centralization  of  the  control 
of  corporations  in  the  national  government.  Why  should 
not  those  who  essay  to  champion  the  interests  of  the  people 
as  opposed  to  the  banks  favor  a  central  bank  with  a 
board  of  direction,  a  majority  of  whom  are  appointed  by 
the  government,  very  much  as  in  the  case  of  the  Reichs- 
bank  in  Germany  ?  Such  a  bank,  like  other  business  en- 
terprises, should  earn  a  reasonable  increment  upon  the 
capital  invested,  but  at  the  same  time  the  altruistic  in- 
fluences, personated  by  the  government,  would  largely 
control.     All  dividends  in  excess  of  a  fixed  rate  should  go 


58  THE    CURRENCY   PROBLEM 

into  the  United  States  Treasury,  in  order  to  exercise  a  re- 
straining influence  in  its  business  management.  The  note- 
issuing  privilege  and  the  rate-making  power  would  be  exer- 
cised, not  in  the  interest  of  one  locality,  but  of  all.  The 
Bank  of  England  rate,  the  Bank  of  France  rate,  and  the 
Bank  of  Germany  rate  exercise  a  controlling  influence  in 
those  countries  by  force  of  example  and  force  of  compe- 
tition. The  Bank  of  France  has  branches  throughout 
France,  and  the  same  rate  of  discount  obtains  at  all 
branches  on  the  same  day. 

By  example,  as  well  as  money  power,  similar  institutions 
could  be  made  to  exercise  a  most  wholesome  influence  in 
bringing  about  a  more  uniform  rate  of  interest  throughout 
our  country.     A  central  bank  could  render  even  greater 
service  in  preventing  the  wide  and  wild  fluctuations  in  the 
rate  of  interest  which,  under  our  present  system,  have  such 
a  disturbing  influence  upon  business  affairs.     A  disturb- 
ance in  money  rates  seems  to  characterize  crop-moving 
periods.     It  is  natural,   perhaps,   that   a  higher  rate   of 
interest  should  accompany  periods  of  business  activity, 
in  accordance  with  the  law  of  supply  and  demand;    but 
fluctuations  at  the  rapid  rate  which  obtains  in  this  country 
are  properly  chargeable  to  our  defective  currency  system. 
Were    an    adequate    note-issuing   power  given  to  such  a 
central  bank,  interest  rates  could  be  kept  reasonably  uni- 
form in  this  country,  precisely  as  they  are  in  other  great 
commercial  nations  of  the  world.    With  a  pronounced  trend 
in  favor  of  centralization,  with  the  popular  and  growing 
demand  that  all  corporations,  national  in  their  scope  and 
character,  be  regulated  by  the  national  government,  is  it 
not  logical  and  fair  to  assume  that  public  sentiment  will 
presently  demand  that  the  government's  receipts  and  dis- 
bursements shall  be  made  through  a  central  bank,  thereby 
keeping  funds  in  the  channels  of  commerce  and  avoiding 
the  embarrassment  and  injury  which  result  from  the  ab- 


GOVERNMENT  CURRENCY  VS.   BANK  CURRENCY  59 

sorption  of  funds  and  their  subsequent  deposit  in  a  lump 
sum  in  the  banks,  which  is  the  practical  working  of  our 
subtreasury  system;  and  will  not  an  intelligent  public 
sentiment  demand  that  our  currency  — the  life-blood  of 
all  industry  — be  regulated  and  controlled  through  the 
instrumentality  of  a  government-controlled  central  bank 
of  issue  ?  The  very  people  who  inveigh  against  banks 
as  a  whole  should  demand  this  in  furtherance  of  the  pur- 
poses they  now  have  at  heart. 

Why  will  not  a  government-controlled  central  bank  of 
issue,  where  the  banks  of  the  country  in  good  credit  can, 
within  proper  limitations,  discount  their  receivables,  re- 
ceiving the  proceeds  thereof  in  bank-notes,  afford  the  best 
solution  of  the  currency  question  ? 


GOLD   MOVEMENTS  AND   THE  FOREIGN 
EXCHANGES 

BY 

ALBERT  STRAUSS 


GOLD  MOVEMENTS  AND  THE  FOREIGN 
EXCHANGES 

Foreign  exchange  is  the  medium  by  means  of  which  we 
pay  our  foreign  creditors  and  collect  from  our  foreign 
debtors :  when  the  supply  of  exchange  fails,  we  pay  our 
debts  by  exporting  gold ;  when  the  demand  for  exchange 
fails,  we  collect  our  debts  by  importing  gold.  So  long  as 
both  supply  of  and  demand  for  exchange  exist,  we  settle 
our  accounts  through  the  foreign  exchange  market  which, 
like  all  markets,  fluctuates  with  the  relative  eagerness  of 
sellers  and  buyers.  We  speak  loosely  of  New  York  owing 
money  to  London;  of  Berlin  owing  to  Paris.  What  we 
mean,  of  course,  is  that  on  balance,  New  York  individuals 
owe  to  London  individuals.  But  we  are  the  slaves  of  our 
phrases;  what  begins  by  being  metaphor  ends  by  domi- 
nating our  thinking,  and  so  we  are  apt  to  picture  London 
as  one  huge  creditor,  malignantly  collecting  the  last  penny 
from  unfortunate  New  York;  and  we  often  reason  about 
these  matters  as  though  the  pictures  that  our  words  call 
up  were  real.  Platitude  though  it  be,  I  repeat  that  inter- 
national commercial  and  financial  relations  are  the  rela- 
tions of  individuals  to  individuals;  it  is  individual  that 
settles  with  individual.  There  is  no  solid  block  of  indebted- 
ness that  London  as  an  entity  can  call  for  payment  from 
New  York  as  an  entity,  or  of  which,  if  inclined  to  be  gra- 
cious, it  can  extend  the  payment.  The  transactions  are 
the  transactions  of  individuals,  and  are  determined  by 
the  judgment  of  each  individual  as  to  what  is  to  his  indi- 
vidual advantage;  if  American  stocks  seem  cheap  to 
London  individuals,  and  they  have  or  can  borrow  the 
means  of  paying,  they  cannot  be  prevented  from  buying 

63 


A  THE   CURRENCY   PROBLEM 

them,  just  as  Americans  cannot  be  prevented  from  buying 
French  motor  cars  if  they  have  the  money  to  pay  for  them. 
So  when  foreign  individuals  commit  what  the  Stock  Ex- 
change regards  as  the  offense  of  selling  securities  in  this 
market,  remember  that  the  American  individuals  that  buy 
the  shares  are  equally  guilty.  A  seller  without  the  corre- 
sponding buyer  cannot  close  a  transaction,  and  the  balance 
of  trade  is  unaffected  by  the  desire  of  foreign  individuals 
to  sell,  unless  there  be  a  corresponding  desire  of  native 
individuals  to  buy  —  supported  by  ability  to  pay.  The 
daily  settlement  of  all  these  individual  transactions  makes 
the  exchange  market,  and  in  the  mechanism  of  that  market 
we  have  an  instrument  powerful  and  economical,  auto- 
matically making  the  most  delicate  adjustments,  actuated 
by  that  most  constant  and  reliable  of  all  motive  powers 
—  self-interest. 

By  foreign  exchange,  we  mean  bills  of  exchange  drawn 
on  foreign  countries,  each  bill  being  payable  in  the  cur- 
rency of  the  country  on  which  it  is  drawn.  The  buyer 
of  such  a  bill  here,  pays  the  equivalent  of  its  value  in  United 
States  money;  the  cost  per  unit  of  the  foreign  money  is 
called  the  rate  of  exchange.  Such  bills  are  payable  on 
demand  (demand  bills)  or  at  a  fixed  number  of  days  after 
sight  or  after  date  (long  bills),  although  sometimes  money 
is  paid  on  cabled  orders,  known  as  cable  transfers.  In  this 
market,  bankers  are  the  traders ;  they  stand  ready  to  buy 
at  prices  varying  from  minute  to  minute  all  bills  offered  for 
sale,  and  at  a  slightly  higher  rate  they  stand  ready  to 
satisfy  the  requirements  of  buyers  by  selling  their  own  bills. 
Bankers  compete  closely  with  each  other  both  in  buying 
the  bills  offered  and  in  selling  their  own  bills  to  supply  the 
requirements  of  buyers,  and  thus  is  created  a  market  in 
which  there  is  but  little  margin  of  profit.  The  bills 
offered  for  sale  may  be  the  bills  of  merchants  with  money 
to  their  credit  abroad,  or  of  brokers  that  have  bought 


GOLD    MOVEMENTS   AND   FOREIGN   EXCHANGES     65 

securities  for  foreign  customers  and  are  drawing  on 
them  to  reimburse  themselves  for  the  cost,  etc.  By  far 
the  greatest  volume  of  exchange,  however,  is  that  created 
by  the  bills  of  grain  and  cotton  exporters.  The  demand 
for  bills  comes  from  importers  that  must  pay  for  sugar, 
coffee,  silks,  etc.,  purchased  abroad;  from  corporations 
that  must  remit  for  interest  or  dividends  payable  to  foreign 
holders;  from  American  travelers,  and  the  like.  The 
market  created  by  these  conflicting  requirements  fluctuates 
within  limits  fixed  on  the  one  hand  by  the  cost  of  exporting 
gold,  and  on  the  other  by  the  cost  of  importing  it.  That 
is  to  say,  the  rates  for  demand  bills  fluctuate  between  these 
limits ;  long  bills  involve  other  elements  as  well ;  for  the 
present,  however,  we  will  confine  ourselves  to  the  con- 
sideration of  demand  bills. 

When  there  is  a  heavy  demand  for  exchange  and  little 
supply,  the  price  of  exchange  gradually  advances.  The 
banker,  called  on  by  his  customers  to  draw  exchange  for 
them,  finding  few  bills  in  the  market  that  he  can  remit 
to  cover  his  drafts,  sends  gold  and  directs  its  equivalent 
in  foreign  coin  to  be  placed  to  his  credit,  and  against 
this  credit  he  draws.  There  may  be  no  market  abroad 
for  our  crops  or  manufactures;  but  gold  need  not  be 
sold  in  order  to  produce  money;  it  need  only  be 
coined.  As  this  process  can  be  carried  on  indefinitely, 
the  cost  of  sending  gold  is  obviously  the  limit  beyond 
which  the  price  of  demand  bills  cannot  advance.  Let 
us  follow  this  transaction  in  detail.  The  pure  gold 
contained  in  one  English  sovereign  is  exactly  equal  to  the 
pure  gold  contained  in  $4.8665  of  our  gold  coins ;  so  that, 
apart  from  charges  and  expenses,  $4.8665  of  our  gold  will, 
when  sent  abroad,  produce  a  credit  of  £1 ;  to  this  cost  must 
be  added  freight,  insurance,  and  other  expenses,  amounting 
to  about  one-fourth  of  one  per  cent.  This  brings  the  cost 
of  £1  through  shipment  of  gold  to  about  $4.88,  which  is, 


66  THE    CURRENCY   PROBLEM 

roughly,  the  gold  export  point  for  full  weight  coin.  The 
exporting  banker  obtains  his  gold  either  by  drawing  gold 
coin  from  his  bank  or  else  by  drawing  suitable  currency 
from  his  bank,  and  obtaining  gold  coin  for  it  at  the  sub- 
treasury.  In  either  case,  he  obtains  coin  that  has  suffered 
more  or  less  abrasion  by  handling,  and  this  loss  of  weight 
by  abrasion,  amounting  to  perhaps  one-tenth  of  one  per 
cent,  increases  the  cost  of  his  remittance.  Generally, 
however,  the  banker  can  obtain  gold  bars  from  the  United 
States  Assay  Office  at  the  nominal  charge  of  one  twenty- 
fifth  of  one  per  cent,  although  at  times  a  larger  charge  is 
made.  The  banker  prefers  bars,  because  on  these  there 
is  no  loss  by  abrasion ;  the  government  can  afford  to  give 
bars,  because  their  export  prevents  the  export  of  coin,  and 
so  saves  the  cost  of  coining  new  money  to  replace  that 
shipped. 

Now  for  gold  import.  When  there  is  a  large  volume  of 
bills  offered  to  bankers,  perhaps  by  grain  and  cotton  ex- 
porters, and  but  little  demand  from  buyers  of  exchange, 
the  market  gradually  declines  in  price,  while  New  York 
bankers,  sending  abroad  the  bills  they  buy,  with  little  occa- 
sion to  draw  against  them,  accumulate  large  sums  to  their 
credit  in  London,  with  no  way  of  getting  the  money  back 
to  New  York  through  operations  in  the  exchange  market. 
They  are  not,  however,  helpless ;  they  can  order  gold  sov- 
ereigns sent  here,  and,  once  here,  can  have  them  melted 
down  at  the  United  States  Assay  Office  and  coined  into 
eagles  and  double  eagles,  which  they  can  deposit  with  their 
banks.  Obviously,  the  amount  received  in  dollars  for 
each  melted  sovereign  will  mark  the  price  the  banker 
can  afford  to  pay  for  sterling  bills,  and  competition  among 
bankers  will  prevent  the  rate  of  exchange  from  declining 
below  this  point  by  more  than  a  fair  margin  of  profit. 
The  British  sovereign,  if  full  weight,  will,  when  sent  here 
and  melted  down,  yield  gold  for  which  the  United  States 


GOLD   MOVEMENTS   AND   FOREIGN   EXCHANGES     67 

Assay  Office  will  pay  $4.8665 ;  the  expense  of  sending 
the  sovereign,  freight,  insurance,  cartage,  and  kegs,  will 
amount  to  about  one-quarter  of  one  per  cent,  so  that  the 
net  yield  of  the  full  weight  sovereign  in  dollars  will  be 
$4.85|- .  But  between  the  day  on  which  the  banker  buys 
the  bill  of  exchange  in  New  York  and  the  day  on  which 
he  receives  in  New  York  the  gold  which  the  bill  entitled 
him  to  collect  in  London,  there  must  elapse  the  time 
needed  to  send  the  bill  to  London,  plus  the  time  needed  to 
send  the  gold  back  (roughly  fifteen  days),  during  which 
period  the  banker  loses  the  use  of  the  money.  This  loss 
of  interest  must  be  deducted  from  the  net  yield  of  the  im- 
ported sovereign,  and  thus,  if  money  is  worth  six  per  cent 
per  annum,  the  net  yield  of  full  weight  sovereigns  is 
brought  down  to  about  $4.84J,  which  is  the  gold  import 
point  for  demand  exchange,  when  money  is  worth  six  per 
cent  per  annum.  Losses  by  abrasion  will  bring  down 
this  point  by  perhaps  one-tenth  of  one  per  cent  to  about 
$4. 83 J.  When  money  is  higher,  the  import  point  will  be 
lower,  and  vice  versa.  There  is  therefore  a  margin  of 
profit  in  buying  demand  bills  and  importing  gold  sover- 
eigns against  the  purchase,  whenever  the  rate  for  demand 
bills  falls  below  the  gold  import  point.  Active  ex- 
change bankers  take  advantage  of  this  profit  whenever 
exchange  prices  decline  to  the  proper  point,  and  their  com- 
petition in  buying  bills  to  cover  their  gold  importations 
stops  further  decline  in  exchange  rates.  It  is  interesting 
to  note  that  during  the  recent  crisis,  when  gold  and  cur- 
rency were  at  a  premium,  bankers  could  sell  the  imported 
gold  at  a  premium,  and  this  constituted  an  additional  and 
very  large  profit ;  gold  importers  could  therefore  pay  higher 
prices  than  ordinarily  for  exchange  bought  to  cover  the 
importations,  and  the  stress  of  competition  so  drove  up 
the  rate  of  exchange  that  gold  was  being  imported  at  a 
profit,    though    exchange    rates    stood    at    what,   under 


68  THE   CURRENCY   PROBLEM 

ordinary  circumstances,  would  have  been  the  gold  export 
point. 

Gold  is,  however,  not  always  imported  from  England 
in  the  form  of  sovereigns.  The  Bank  of  England  has  in 
its  vaults  large  quantities  of  American  eagles  and  double 
eagles  exported  to  England  in  the  past  and  held  without 
melting.  The  Bank  also  holds  foreign  coin  and  bar  gold. 
Any  holder  of  Bank  of  England  notes  can  get  sovereigns 
on  demand  —  other  gold  he  can  get  only  as  the  result  of 
a  special  bargain.  When  gold  is  wanted  for  export,  the 
Bank  is  often  glad  to  sell  bar  gold  or  double  eagles  at  rates 
somewhat  more  advantageous  to  the  exporter  than  would  be 
the  export  of  sovereigns ;  this  the  Bank  can  afford  to  do, 
for  the  expense  of  coining  sovereigns  to  replace  those 
exported  is  thus  saved,  while  the  exporter,  if  he  can  get 
bar  gold  on  the  same  basis  as  sovereigns,  avoids  the  losses 
of  abrasion.  Eagles  are  even  more  advantageous  to  the 
exporter,  for  they  are  bought  in  England  by  weight  and 
used  in  America  by  count;  the  banker  therefore  gets  an 
advantage  if  they  are  light,  so  long  as  that  lightness  is  not 
so  great  as  to  make  them  uncurrent  —  practically  he  buys 
them  as  light  and  uses  them  as  full  weight.  The  quota- 
tions for  bar  gold  and  double  eagles,  as  they  appear  in  the 
newspapers,  may  seem  confusing,  owing  to  the  fact  that 
double  eagles  are  quoted  in  shillings  per  ounce  gross  weight, 
900  fine  (the  American  coinage  standard),  while  bars  are 
quoted  per  ounce  of  gross  weight,  916|  fine  (the  English 
coinage  standard) ;  the  quotation  for  double  eagles,  there- 
fore, always  seems  lower.  When  gold  bars  from  South  Afri- 
can mines  and  elsewhere  arrive  in  London,  the  owners  de- 
posit them  with  the  Bank  of  England,  receiving  sovereigns 
at  the  rate  fixed  by  law,  unless  a  higher  price  is  bid  therefor 
in  the  market  for  the  purpose  of  export  to  other  quarters. 
The  price  of  gold  in  the  market  cannot,  of  course,  rise  above 
the  cost  of  obtaining  gold  by  withdrawing  sovereigns. 


GOLD   MOVEMENTS   AND   FOREIGN   EXCHANGES     69 

The  mechanism  of  gold  import  to,  and  export  from, 
Germany  is  practically  the  same  as  with  England,  the 
Reichsbank  being  required  to  give  gold  coin  in  exchange 
for  its  circulating  notes.  At  times,  however,  German 
exchange  has  fallen  below  the  theoretical  gold  import  point, 
owing,  not  to  the  refusal  of  the  Reichsbank  to  give  gold, 
but  to  the  practical  obstacles  that  at  times  are  somehow 
placed  in  the  way  of  free  export  of  gold.  The  Reichsbank 
does  not  refuse  gold  for  its  bank-notes,  but  German  bank- 
ers say  to  their  correspondents  :  "Don't  ask  us  to  get  gold 
for  you,  or  we  shall  lose  caste,"  and  on  such  occasions  Ger- 
man exchange  rates  drop  to  a  point  that  is  theoretically 
impossible.  I  do  not  mean  to  criticize  them :  German 
banks,  when  they  refuse  to  demand  gold  of  the  Reichsbank, 
do  no  more  than  our  own  banks  and  bankers  did  recently, 
when  asked  by  foreign  correspondents  to  collect  in  gold  the 
maturing  obligations  of  railroads  and  other  corporations. 
As  will  be  remembered,  clearing-house  funds  rather  than 
cash  were  at  that  time  current  here,  and  New  York  banks 
and  bankers  sent  to  their  foreign  correspondents  the 
same  answer  as  the  Germans  have  at  times  sent  us.  I 
cite  the  German  instance  in  partial  mitigation  of  censure 
of  our  own  course,  rather  than  as  a  reproach  to  them. 

The  Bank  of  France  is  not  compelled  to  give  gold  in 
exchange  for  its  circulating  notes ;  it  may  at  its  option  give 
silver.  Thus,  when  it  is  inconvenient  to  give  gold,  the 
bank  can  refuse,  or,  if  it  prefers,  it  can  exact  a  premium. 
This  power  has  been  very  moderately  and  very  wisely 
used  by  the  bank  to  modify  foreign  demands  on  the  one 
hand,  and,  on  the  other,  to  keep  interest  rates  low  for  the 
requirements  of  internal  trade.  Of  course,  when  a  pre- 
mium is  exacted,  the  French  gold  import  point  drops 
accordingly. 

Between  the  gold  export  point  and  the  gold  import 
point,  exchange  fluctuates  under  the  sway  of  conflicting 


70  THE    CURRENCY   PROBLEM 

currents  and  tendencies  —  I  had  almost  said  emotions, 
for  these  currents  and  tendencies  have  their  rise  in  emo- 
tions, needs,  and  passions  as  varied  as  life  itself,  whether 
they  be  hunger  as  expressed  in  the  grain  bill,  or  love  of 
elegance  in  the  importation  of  silk,  or  forethought  in  the 
profitable  investment  of  capital. 

This  brief  review  will  have  made  clear  what  is  meant  by 
a  free  gold  market  —  a  market  in  which  current  money 
can  at  all  times  be  exchanged  for  gold  without  delay  and 
without  premium.  Such  a  market  has  great  commercial 
advantages ;  its  stability  draws  business  to  it.  London  is 
such  a  market,  and  its  commercial  and  financial  preemi- 
nence is  in  great  measure  due  to  that  fact.  Paris  is  not 
such  a  market  and  does  not  pretend  to  be;  Berlin  pre- 
tends to  be,  but  cannot  always  be  counted  on ;  New  York 
was  believed  to  be  before  our  recent  panic. 

I  have  spoken  of  the  exchange  market  as  an  economical 
mechanism,  automatically  making  delicate  international 
adjustments.  In  justification  of  that  observation,  let  me 
direct  attention  to  the  manner  in  which  gold,  in  moving 
from  financial  center  to  financial  center,  always  travels 
by  the  most  direct  route,  and  that,  too,  not  because  some 
public  official  is  charged  with  the  duty  of  preventing 
waste,  but  because  a  private  trader  is  trying  to  make  a 
profit,  and  is  incidentally  serving  the  community;  serving 
it  perhaps  better  than  if  he  had  consciously  determined 
to  serve  it. 

Useful  acts  springing  from  self-interest  have  one  very 
comforting  aspect  —  we  need  have  no  misgivings  as  to  their 
continuance.  Charity  may  grow  weary  or  disgusted,  but 
self-interest,  once  enlisted,  may  be  counted  on  to  continue 
in  operation,  whether  it  be  the  business  man's  self-interest 
in  a  profit  or  the  professional  man's  self-interest  in  ad- 
vancement and  fame.  Of  course,  both  the  business  man 
and  the  professional  man,  in  addition  to  seeking  the  direct 


GOLD   MOVEMENTS   AND   FOREIGN   EXCHANGES     71 

rewards  of  their  labor,  take  an  interest  in  their  work  as 
work  and  make  it  yield  them  pleasure 

It  is  therefore  satisfactory  to  know  that,  so  long  as  the 
banker  looks  after  his  profits,  gold  will  move  by  the  most 
direct  route.     Let  us  suppose  the  United  States  to  be  ex- 
porting a  large  quantity  of  cotton  to  England  at  a  time 
when  little  merchandise  is  being  imported  here  from  Eng- 
land, but  when  much  is  being  imported  from  France      It 
the  volume  of  exports  to  England  and  of  imports  from 
France  were  large  enough,  we  might  conceivably  be  im- 
porting gold  from  England  in  payment  of  our  produce, 
and  exporting  it  to  France  in  payment  for  her  luxuries; 
but,  in  practice,  gold  does  not  move  that  way.     Every 
morning,  the  New  York  exchange  banker  learns  by  cable 
the  Paris  market  rate  for  demand  bills  on  London.     When, 
therefore,  he  finds  a  large  volume  of  bills  on  London 
offered  for  sale,  and  little  demand  for  such  bills,  while  there 
is  large  demand  for  bills  on  Paris  and  little  supply,  he 
determines,  instead  of  drawing  from  New  York  against 
hts  purchases  of  London  bills,  to  let  his  Paris  agent  draw 
against  these  purchases,  placing  the  proceeds  to  his  credit 
1  Paris;    against  this   credit  in   Pans,   the  New  York 
banker  draws  his  bill  in  francs,  having  thus  supplied  via 
London  the  New  York  demand  for  bills  on  Pans      He 
knows  how  many  dollars  each  pound  sterling  costs  h.m  in 
New  York,  and  the  Paris  rate  for  bills  on  London  tells  him 
how  many  francs  each  pound  sterling  will  net  him  in  Pans 
and  so  he  can  calculate  how  many  cents  each  franc  will 
cost  him.     Moreover,  he  is  not  the  only  banker  m  New 
York  that  receives  cable  quotations;   and  so  with  a  large 
volume  of  London  bills  offered  and  little  direc  demand  for 
such  bills,  and  large  demand  for  Pans  bills  with h tie 
direct  supply,  we  get  a  situation  where  New  York  bankers 
competing  with  each  other  to  buy  the  London  bills  for  use 
via  Parisf  prevent  the  price  of  sterling  from  falling  to  the 


72  THE   CURRENCY   PROBLEM 

gold  import  point ;  and  then,  as  a  result,  these  same  bank- 
ers, competing  with  each  other  to  supply  the  demand  for 
Paris  bills,  by  their  competition  prevent  the  Paris  rate  from 
rising  to  gold  export  point.  Lastly,  they  compete  with 
each  other  in  Paris,  where  all  are  sellers  of  bills  on  London 
against  their  New  York  purchases  of  London  bills,  and 
by  that  competition  they  reduce  the  rate  for  London  bills 
in  Paris  to  the  point,  at  which,  other  things  being  equal, 
gold  will  go  from  London  to  Paris.  What  has  happened, 
therefore,  is  that  instead  of  our  importing  gold  from  Lon- 
don, and  then  exporting  it  to  Paris,  it  has  gone  direct  from 
London  to  Paris.  Why?  Not  because  some  one  has 
deliberately  set  himself  to  benefit  the  community,  but  sim- 
ply as  the  result  of  the  blind  working  of  economic  forces, 
under  the  actuating  impulse  of  individuals  seeking  their 
own  profit.  This  tendency  to  work  out  advantageous 
economic  results  under  the  pressure  of  selfish  impulses, 
appears  again  and  again  in  all  phases  of  business ;  it  can- 
not be  too  strongly  brought  to  view,  because  of  the  practi- 
cal conclusion  to  which  it  points.  The  community  will 
benefit  most  if  commerce  and  its  instruments  be  free 
from  arbitrary  interference  by  government.  Violations  of 
economic,  as  of  natural  laws,  in  time  wreak  their  own 
vengeance. 

Transactions  such  as  those  described  above,  where  a 
bill  on  one  market  is  bought  in  a  second  market,  and  sent 
into  a  third  market,  are  called  exchange  arbitrage,  and  they 
are  of  infinite  variety.  Bills  are  drawn  on  Paris  against 
German  exchange ;  bills  are  drawn  on  Scandinavia  against 
remittances  to  London;  the  proceeds  of  bills  on  Switzer- 
land or  Italy  are  sent  to  Paris  or  to  London,  etc. ;  and 
many  of  these  combinations  are  daily  calculated  by  numer- 
ous active  bankers  all  over  the  world,  who  take  advantage 
of  every  one  sixty-fourth  of  one  per  cent  of  margin. 
Thus  are  the  markets  kept  from  drifting  apart.     It  may 


GOLD   MOVEMENTS   AND   FOREIGN   EXCHANGES     73 

be  asked  who  benefits  by  this  competition.  The  answer 
is  that  the  merchant  benefits,  the  importer  as  a  result  buy- 
ing his  exchange  more  advantageously,  and  the  grain  and 
cotton  exporter  selling  his  bills  at  a  better  price. 

So  much  for  checks  or  demand  exchange.  Cable 
transfers  require  but  a  word.  They  differ  from  demand 
exchange  in  that  the  proceeds  are  paid  out  at  once  at 
destination,  instead  of  awaiting  transit  of  a  bill  by  steamer 
—  hence  the  seller  of  cable  transfers  loses  interest  during 
the  time  of  transit  at  the  rate  of  interest  current  in  the 
market  to  which  the  transfer  is  made,  and  his  rate  for 
selling  cable  transfers  is  accordingly  higher  by  so  much. 
In  abnormal  times,  however,  the  difference  may  be  much 
greater;  during  last  November,  for  instance,  when  Lon- 
don banks  were  unwilling  to  advance  money  to  facilitate 
the  shipment  of  gold,  the  possession  of  funds  in  London 
was  an  advantage,  the  value  of  which  was  measured  by  the 
profit  on  gold  shipments,  and  this  profit,  owing  to  our  cur- 
rency premium,  was  great  enough  to  make  cable  transfers 
unusually  valuable. 

Hitherto  we  have  considered  only  the  exchange  of  the 
money  of  one  currency  into  that  of  another,  and  the 
mechanism  by  which  this  is  effected ;  with  long  bills  we 
enter  the  domain  of  international  credit.  Credit  is  a 
strange  thing,  delicate,  sensitive,  and  yet  hardy,  —  hardy 
enough  to  do  the  heaviest  work  under  sympathetic  condi- 
tions, and  yet  so  delicate  and  sensitive  that  the  slightest 
false  note  will  cause  it  to  shrink  and  withdraw ;  and  when  it 
withdraws,  neither  coaxing  nor  force  (least  of  all  force) 
can  draw  it  back  until  conditions  are  again  suitable  to 
its  temperament.  When  credit  ceases  to  work  for  us, 
the  burden  is  thrown  upon  coin,  a  slow,  lumbering  sub- 
stitute. It  is  as  though  the  main  engine  of  a  huge  factory 
had  broken  down,  and  the  workmen  were  attempting  to  do 
with  hand  tools  what  the  machines  had  before  been  doing. 


74  THE    CURRENCY   PROBLEM 

Before  discussing  long  bills  drawn  by  bankers  here  on 
their  correspondents  abroad,  which  bills  are  the  principal 
medium  whereby  money  rates  between  markets  are  equal- 
ized, let  us  consider  commercial  long  bills.  A  merchant 
here  buys  goods  in  India  or  China ;  the  seller  desires  to  be 
paid  when  he  ships  the  goods ;  the  buyer  cannot  afford  to 
pay  for  the  goods  before  he  receives  them,  perhaps  not 
until  he  has  had  time  to  deliver  them  to  his  customers 
here.  What  happens  ?  It  may  be  asked,  why  not  let  the 
China  merchant  draw  on  the  New  York  merchant,  and 
attach  to  the  drafts  the  bills  of  lading  and  insurance 
policies  representing  title  to  the  goods  shipped.  There  are 
several  reasons. 

In  the  first  place,  banks  in  China  prefer  bills  on  London ; 
not  only  are  they  mostly  English  banks,  which  do  not 
keep  well  informed  on  New  York  rates  of  exchange,  but 
in  addition  the  pound  sterling  has  always  been  the  current 
international  money.  You  might  as  well  defy  a  law  of 
nature  as  a  trade  custom;  such  customs  cannot  be  rea- 
soned with.  As  Walter  Bagehot  well  puts  it:  "In  every 
market  a  dealer  must  conduct  his  business  according  to  the 
customs  of  the  market,  or  he  will  not  be  able  to  conduct  it 
at  all."  Again,  the  China  merchant's  bank  may  not  want 
to  incur  the  risk  of  buying  the  bill  of  exchange,  even  with 
shipping  documents  attached,  for  fear  that  the  New  York 
merchant  should  on  some  pretext  refuse  payment,  in  which 
case  the  China  bank,  instead  of  cash  to  its  credit,  would 
have  a  shipment  of  merchandise  on  its  hands  in  New  York. 
Further,  the  China  merchant  himself  may  not  know  the 
New  York  merchant  well  enough  to  ship  goods  and  to  take 
the  chance  of  their  being  refused.  Lastly,  as  the  draft 
would  generally  reach  New  York  before  the  shipment,  the 
New  York  merchant  would  have  to  pay  for  the  goods  be- 
fore he  actually  had  them  in  hand.  To  overcome  these 
obstacles,  it  has  been  for  years  a  custom,  in  cases  where 


GOLD   MOVEMENTS   AND   FOREIGN   EXCHANGES     75 

the  New  York  merchant  trusts  the  China  merchant,  for 
the  former  to  get  from  his  New  York  bankers,  who  must 
be  a  firm  of  world-wide  reputation,  a  letter  addressed  to 
their  London  agent  directing  the  London  banker  to  accept 
the  sixty-day  or  ninety-day  or  four-months  bill  of  exchange 
of  the  China  merchant,  when  such  bill  of  exchange  is 
accompanied  by  bills  of  lading,  insurance  policy,  consular 
invoice,  etc.,  in  respect  of  a  shipment  of  merchandise,  the 
nature  of  which  is  specified  in  the  letter.  This  is  called  a 
letter  of  credit,  and  this  letter  of  credit  the  New  York 
merchant  sends  to  the  China  merchant  with  his  order  for 
goods.  When  the  shipment  is  ready,  the  China  merchant 
draws  his  bill  on  London  at  ninety  days'  sight,  let  us  say, 
and  takes  it,  together  with  the  letter  of  credit  and  the 
shipping  documents,  to  his  own  bank  in  China.  This 
bank,  on  the  authority  of  the  New  York  banker's  letter  of 
credit,  buys  the  bill  on  London  at  the  current  rate  for 
such  bills.  The  China  bank  sends  the  bill  to  its  London 
agent,  who  presents  it  to  the  London  agent  of  the  New 
York  banker  for  acceptance;  upon  acceptance  the  ship- 
ping papers  go  to  the  accepting  banker,  who  thereupon 
sends  them  to  the  New  York  banker.  Neither  the  New 
York  banker  nor  his  London  agent  has  so  far  paid  any 
cash ;  they  have  simply  lent  their  credit.  When  the  goods 
arrive  in  New  York,  the  New  York  banker  permits  the 
New  York  merchant  to  take  possession  of  them  and  to 
deliver  them  to  his  customers,  from  whom  he  receives  pay- 
ment for  them.  The  New  York  merchant  must  pay  his 
New  York  banker  in  ample  time  to  permit  the  latter  to 
remit  to  his  London  agent  before  the  bill  of  exchange  falls 
due  in  London. 

Let  us  now  turn  back  and  follow  the  fate  of  the  bill 
of  exchange  after  it  has  been  accepted  and  handed 
back  to  the  London  agent  of  the  China  bank.  It  is  now 
a  bill  having  ninety  days  to  run,  drawn  by  the  China 


76  THE    CURRENCY   PROBLEM 

merchant,  accepted  by  the  London  agent  of  the  New 
York  banker,  and  indorsed  by  the  China  bank  as  well 
as  by  its  London  agent  —  a  very  substantial  commercial 
instrument.  In  this  form,  it  is  offered  for  discount  to 
one  of  the  great  English  discount  houses,  which  pays 
over  to  the  London  agent  of  the  China  bank  the  pro- 
ceeds, less  interest  to  maturity  at  the  current  rate.  In 
anticipation  of  the  discounting  of  this  bill  in  London,  the 
China  bank  has  drawn  a  demand  bill  on  its  London  agent, 
and  so  has  reimbursed  itself  for  the  money  paif  to  the 
China  merchant  in  buying  his  bill.  The  whole  transaction 
has  thus  been  handled  by  means  of  credit  through  the 
creation  of  a  commercial  instrument  of  high  character, 
in  which  the  London  discount  house  was  glad  to  invest  its 
deposits;  these  deposits  themselves  being  but  credits  in 
another  form  —  but  that  is  another  story. 

So  much  for  the  part  played  by  long  bills  in  our  import  of 
commodities.  Now  for  a  typical  case  touching  exports. 
Let  us  take  cotton.  For  some  reason,  perhaps  because 
buyer  and  seller  are  separated  by  only  a  week's  trip,  and  so 
know  each  other  better,  letters  of  credit  are  not  custom- 
ary in  connection  with  our  exports  of  cotton.  When  we 
export  cotton,  the  China  case  is  practically  repeated ;  a 
credit  is  opened,  only  no  letter  of  credit  is  actually  issued. 
The  English  buyer  arranges  with  his  banker  to  accept  the 
drafts  of  the  American  cotton  dealer  and  notifies  the  Ameri- 
can dealer  to  draw  his  sixty-day  bill  on  the  London 
bank,  with  shipping  documents  attached.  The  American 
cotton  dealer  borrows  from  his  local  bank  to  buy  cotton 
from  the  farmer,  whom  he  pays  in  cash;  when  he  has 
gathered  enough  cotton  for  a  shipment,  he  ships  on,  through 
bills  of  lading,  from  his  Southern  home  direct  to  Liverpool ; 
these  bills  of  lading  he  attaches  to  his  sixty-day  draft  on 
London,  and  the  London  draft  with  its  documents  he 
attaches  to  a  draft  on  his  New  York  agent.     With  this 


GOLD   MOVEMENTS   AND   FOREIGN   EXCHANGES     77 

New  York  draft  he  repays  the  local  bank.  The  New 
York  agent,  in  turn,  sells  this  sixty-day  bill  on  London  to 
a  New  York  banker,  and  with  the  proceeds  meets  the  cotton 
dealer's  draft  on  him.  On  the  other  hand,  the  exchange 
banker  sends  the  sixty-day  bill  to  London  for  discount, 
and  against  the  proceeds  draws  a  demand  bill  on  London. 
It  is  the  China  case  over  again. 

The  London  discount  houses,  bill  brokers,  and  others 
dealing  in  acceptances  and  other  commercial  instruments 
can,  under  regulations  and  within  limitations  prescribed 
by  that  Bank,  at  any  time  rediscount  at  the  Bank  of  Eng- 
land, at  its  posted  rate,  the  commercial  instruments  they 
hold.  German  banks  can  do  the  same  at  the  Reichsbank, 
and  French  banks  at  the  Ban  que  de  France.  When  the 
volume  of  such  rediscounts  increases  beyond  the  limit 
deemed  advisable  by  the  bank,  the  bank  raises  its  discount 
rate,  with  the  immediate  effect  not  only  of  checking  re- 
discounts, which  thus  involve  losses,  but  with  the  further 
effect  of  making  unprofitable  the  drawing  of  foreign 
bankers'  long  bills,  these  bills  being  drawn  for  the  purpose 
of  lending  the  proceeds  in  some  dearer  money  market,  as 
explained  hereafter.  The  raising  of  the  bank  rate,  by  its 
tendency  to  check  the  drawing  of  foreign  long  bills,  reduces 
the  credit  balances  of  foreign  bankers,  and  so  tends  either 
to  attract  gold  to  London,  or  else  to  decrease  the  chance  of 
its  export;  but,  while  thus  tending  to  protect  the  Bank's 
gold,  it  has  the  incidental  effect  of  penalizing  domestic 
business  by  its  high  rates,  and  as  a  consequence  it  is  usually 
resorted  to  with  reluctance. 

In  London,  Paris,  and  Berlin,  and,  in  fact,  at  all  the 
foreign  centers,  the  quick  assets  of  banks  are  to  a  great 
extent  invested  in  acceptances  having  three  months  or  less 
to  run.  The  volume  of  capital  so  invested  is  enormous ; 
these  acceptances  are  constantly  maturing,  and  the  pro- 
ceeds are  constantly  being  reinvested.     Being  always  in 


78  THE   CURRENCY   PROBLEM 

a  state  of  flux,  this  capital  is  ready  at  a  moment's  notice  to 
depart  for  the  most  remunerative  market.  These  banks 
regard  foreign  acceptances  as  very  desirable  investments, 
and  are  eager  to  take  them  when  their  rates  are  more 
remunerative  than  home  rates.  For  should  home  rates 
advance,  the  possession  of  maturing  foreign  bills  enables 
any  bank  to  extend  additional  assistance  to  its  customers, 
without  calling  on  other  home  industries  to  contract  their 
lines  of  credit;  furthermore,  the  possession  of  such  bills 
enables  gold  to  be  drawn  from  abroad,  if  needed. 

When  a  bank  rate  is  so  raised,  it  has  the  further  effect  of 
increasing  the  rate  of  interest  charged  on  securities  carried 
in  that  market,  and  this  tends  to  make  brokers  and  deal- 
ers pay  their  indebtedness  in  the  dearer  market,  and  to 
transfer  their  loans  to  a  cheaper  market.  It  has  the  ten- 
dency of  making  all  international  debtors  pay  their  indebt- 
edness in  that  market  and  borrow  in  cheaper  markets. 
These  tendencies  all  combine  to  lower  rates  in  the  market 
affected,  and  to  raise  them  in  cheaper  money  markets. 
The  vast  mass  of  fluid  credits  at  the  disposal  of  the  Lon- 
don and  Paris  markets  give  these  markets  their  supremacy. 
American  capital  has  been  and  is  so  fully  employed  in  the 
development  of  native  resources  that  it  is  not  generally 
available  for  investment  abroad,  and  so  New  York  cannot 
hope  for  many  years  to  occupy  the  central  position  in  the 
financial  world.  Important  New  York  certainly  is,  and 
its  importance  is  growing;  the  large  exports  of  American 
grain  and  cotton  give  it  the  capacity  at  times  to  dominate 
other  markets  by  drawing  gold,  and  this  makes  it  at  such 
times  a  formidable  factor ;  but,  until  it  has  acquired  a  vast 
fund  of  fluid  capital  ready  to  seek  temporary  investment 
in  the  best-paying  market,  it  will  not  be  a  financial  arbiter 
among  nations. 

The  most  elusive  part  of  the  subject  remains  to  be  dis- 
cussed, viz.,  bankers'  long  bills.     They  constitute,  as  be- 


GOLD   MOVEMENTS   AND    FOREIGN   EXCHANGES     79' 

tween  the  United  States  and  Europe,  the  principal  medium 
of  equalizing  money  rates,  and,  as  pointed  out  by  Mr.  Paul 
M.  Warburg  in  his  very  able  pamphlet,1  they  are  far  too 
limited  in  their  scope  to  do  justice  to  our  requirements. 
When  English  discount  rates  rise,  French  bankers  buy 
English  acceptances,  thereby  employing  their  funds  more 
profitably  than  at  home ;  their  buying  tends  to  lower  Lon- 
don rates,  and  their  abstention  from  the  Paris  market  to 
raise  rates  there.  Berlin  bankers  do  the  same,  both  in 
London  and  in  Paris.  The  bankers  of  the  European 
money  centers  are  constantly  scanning  the  possibilities  of 
one  another's  money  markets.  But  they  cannot  operate 
thus  directly  in  the  New  York  market,  because  we  have 
not  created  a  commercial  instrument  responsive  to  their 
demand.  Where  we  in  the  United  States  allow  debts 
between  merchants  to  stand  as  open  accounts,  debtor 
merchants  abroad  furnish  their  creditors  with  bank 
acceptances,  and  these  the  creditor  discounts  through 
his  bank.  Our  failure  to  provide  such  a  commercial 
tool  makes  it  impossible  for  foreign  banks  to  invest  here 
in  bills  bearing  the  number  of  responsible  commercial 
and  banking  names  to  which  they  are  accustomed,  and  so 
our  ability  to  attract  for  temporary  use  the  funds  of  other 
markets  is  limited  to  the  long  bills  of  such  of  our  banks  and 
bankers  as  do  a  foreign  exchange  business. 

If  the  rate  of  discount  in  London  is  three  per  cent,  and  if 
a  New  York  banker  can  draw  a  sixty-day  bill  on  his  Lon- 
don agent  and  sell  it  in  New  York  at  a  price  based  on  the 
London  discount,  the  drawer's  profit  or  loss  in  the  transac- 
tion will  depend  on  two  factors  :  first,  on  the  rate  of  interest 
at  which  he  can  employ  the  proceeds  in  New  York,  and, 
secondly,  on  the  rate  of  exchange  that  he  will  have  to 
pay  for  demand  bills  sixty  days  hence,  for  then  he  must 
meet  his  maturing  long  bill  in  London.     If  money  here 

1  Defects  and  Needs  of  our  Banking  System,  by  Paul  M.  Warburg,  1907. 


60  THE    CURRENCY   PROBLEM 

can  be  invested  for  those  sixty  days  at  four  per  cent  per 
annum,  he  will  have  a  margin  of  interest  at  the  rate  of  one 
per  cent  per  annum  for  sixty  days,  or  one-sixth  of  one  per 
cent,  out  of  which  to  pay  his  London  commissions,  to  meet 
any  loss  of  exchange,  and  to  find  his  profit.  If,  when  his 
sixty-day  bill  matures,  demand  bills  on  London  are  again 
selling  at  the  same  rate  as  when  he  drew  the  bill,  his  profit 
will  be  one-sixth  of  one  per  cent  less  his  London  com- 
missions. If  the  exchange  rate  is  then  lower,  he  will 
make  an  additional  profit;  if  higher,  he  may  make  no 
profit  —  he  may  even  face  a  loss.  If  the  general  level  of 
exchange  is  high  when  he  draws  his  bill,  he  will  be  more 
likely  to  make  a  profit  on  exchange,  and  will  therefore  be 
content  with  a  smaller  interest  profit,  while,  with  exchange 
very  high,  he  may  be  content  with  no  interest  profit  at  all, 
relying  on  the  exchange  profit  alone.  So,  too,  the  season 
of  the  year  when  his  long  bill  matures  will  influence  him ; 
other  things  being  equal,  exchange  is  likely  to  be  lower  in 
the  autumn,  when  our  exports  reach  their  maximum, 
and  higher  at  the  end  of  the  year,  when  interest  remittances 
are  to  be  made.  In  reliance  on,  or  rather  in  anticipation 
of,  these  seasonal  fluctuations,  bankers  are  apt  in  July 
and  August  to  draw  long  bills,  so  that  these  may  mature 
about  the  time  when  cotton  and  grain  bills  come  into  the 
market,  hoping  to  cover  at  a  profit  by  purchasing  the 
export  bills. 

The  requirements  of  bankers,  seeking  to  cover  these 
summer-drawn  bills,  provide  a  good  market  for  exporters' 
bills.  During  last  summer,  however,  London  houses, 
mistrusting  the  state  of  American  credit,  discriminated 
against  American  bankers'  bills,  and  as  a  result  com- 
paratively few  were  outstanding  last  autumn.  This  cir- 
cumstance led  to  a  situation  containing  perhaps  certain 
elements  of  retribution.  The  exchange  market  had  ad- 
justed itself  to  these  new  conditions  before  autumn.     At 


GOLD   MOVEMENTS   AND   FOREIGN   EXCHANGES     81 

that  time  grain  and  cotton  bills  began  to  come  forward  in 
great  quantity,  for  Europe's  harvests  had  been  scant,  and 
our  produce  was  needed  there.  With  little  demand  from 
bankers  to  meet  maturing  long  bills,  the  importation  of  a 
large  amount  of  gold  was  inevitable,  and  this  import  move- 
ment gained  added  impetus  from  the  very  considerable 
purchases  of  our  securities  by  Europeans  at  panic  prices. 
In  other  words,  by  discriminating  against  American  bills 
during  the  summer,  the  London  financial  houses  had  put 
out  of  action  the  automatic  governor  that  tends  to  hold 
things  even,  with  the  result  that  in  the  autumn  they  were 
entirely  defenseless  against  our  large  demands  for  gold. 

But  to  return  to  bankers'  long  bills.  Such  bills  when 
sold  here  are  bought  by  other  bankers  who  happen  to  need 
remittances,  for,  when  these  bills  have  been  discounted 
in  London,  they  are  cash  and  answer  the  same  purpose  as 
demand  bills.  Involving,  as  they  do,  however,  a  slight 
risk  for  sixty  days,  they  sell  an  infinitesimal  fraction  lower 
than  a  precise  calculation  of  the  discount  would  warrant, 
and  are  to  that  extent  a  more  economical  remittance.  Bank- 
ers buy  such  bills  to  cover  the  demand  drafts  they  have 
sold  to  their  customers.  The  same  banker  may  therefore 
be  buying  long  bills  to  cover  his  own  demand  bills,  and 
at  the  same  time  be  selling  long  bills  in  order  to  lend  out  the 
proceeds.  It  was  by  means  of  long  bills  that,  in  1895, 
gold  exports  from  New  York,  when  they  had  reached  a 
menacing  point,  were  checked  by  a  syndicate  headed  by 
J.  P.  Morgan  and  Company.  This  syndicate  comprised 
all  the  leading  drawers  of  foreign  exchange,  and  the  pur- 
pose of  its  formation  was  to  create  a  sufficient  volume 
of  exchange  by  drawing  of  long  bills  (whether  at  a  profit 
or  at  a  loss)  to  prevent  further  exports  of  gold.  It  was 
successful  in  accomplishing  this  purpose. 

Bearing  in  mind,  then,  that  the  general  level  of  exchange 
rates  will  in  part  determine  the  decision  of  the  banker  in 


82  THE    CURRENCY   PROBLEM 

drawing  long  bills,  we  are  prepared  to  understand  the 
automatic  operation  by  which  economy  of  gold  movement 
is  secured,  through  postponing  exports  or  imports  until 
conditions  make  them  imperatively  necessary. 

Should  exchange  rates  rise  very  high  and  approach  the 
export  point  at  a  time  when  money  rates  here  are  higher 
than  they  are  abroad,  we  should  have  at  work  two  causes 
tending  to  create  additional  bills  of  exchange,  and  so,  by 
keeping  down  exchange  rates,  to  postpone  the  export  of 
gold.  These  causes  are  the  high  money  rate  and  the  high 
exchange  rate,  both,  as  explained,  strong  inducements 
for  drawing  long  bills.  When  interest  rates  in  the 
two  markets  are  about  equal,  the  interest  motive  is  in- 
operative, and  only  the  exchange  motive  for  drawing  long 
bills  exists ;  the  effect  of  that  alone,  though  of  less  force, 
would  again  be  to  retard  exports. 

With  gold  imports,  we  see  corresponding  forces  at  work. 
To  make  gold  import  probable,  exchange  must  be  low ; 
under  those  circumstances  there  is  little  inducement  to 
draw  long  bills,  unless  money  rates  here  are  very  high 
indeed.  To  the  extent  that  they  are  drawn,  however,  they 
facilitate  imports  by  forcing  down  exchange,  and  so  hasten 
the  journey  of  gold  to  the  dearer  money  market ;  but  this 
occurs  only  when  the  money  market  is  in  great  need.  On 
the  other  hand,  when,  with  low  exchange  rates,  money 
rates  are  also  low,  bankers  will  hold  commercial  long  bills 
without  discounting  them  abroad,  and  without  drawing 
against  the  proceeds,  not  only  because  the  higher  foreign 
interest  rate,  on  the  basis  of  which  the  bills  are  bought,  is 
more  remunerative,  but  also  because  there  is  the  chance  of 
selling  the  exchange  at  higher  rates  later.  When  exchange 
is  so  held  without  discounting  or  drawing  against  it,  it  is 
virtually  taken  out  of  the  market,  thus  raising  exchange 
rates  and  deferring  imports. 

So  once  more  we  see  the  trader's  eager  quest  for  a  profit, 


GOLD   MOVEMENTS   AND   FOREIGN   EXCHANGES     83 

regulating,  automatically,  financial  adjustments  that  pa- 
ternal oversight  by  government  might  bungle,  but  could, 
in  no  event,  improve. 

Some  of  the  great  foreign  banks,  notably  the  Bank  of 
France,  seek  at  times  to  stimulate  the  import  of  gold  into 
their  market  by  lending  to  private  banks,  without  interest, 
the  cash  needed  for  the  operation.     Leslie  M.  Shaw,  when 
Secretary  of  the  Treasury,  made  similar  loans  to  national 
banks   here,  returnable  on  receipt  of  the  imported  gold 
from  abroad.     Secretary  Shaw  did  this  at  a  time  when 
exchange   had  fallen  to   a  point   at  which   importations 
would  have  been  possible,  had  interest  rates  been  at  six 
per  cent;    interest,  however,  was  much  higher  than  six 
per  cent,  and  so  no  gold  was  being  imported.     Interest 
may  be  regarded  as  the  friction  of  commercial  machinery, 
and  in  the  case  in  question  the  friction  was  so  great  that  the 
gold-importing  machinery  needed  unusual  power  to  start  it. 
The    secretary    overcame    the    friction.     This    action    of 
Secretary  Shaw  has  been  much  discussed,  and  different 
views  in  regard  to  it  are  entertained.     Certainly  greater 
justification  for  such  action  existed  than  often  exists  when 
the  Bank  of  France  takes  similar  action.     The  sufferers 
from  failure  to  import  gold  promptly  had  been  our  ex- 
porters, who,  by  reason  of  the  unusually  low  level  of  ex- 
change rates,  had  been  receiving  low  rates  for  the  export 
bills  they  had  for  sale,  though  they  probably  succeeded  in 
shifting  a  part  of  this  load  to  the  shoulders  of  foreign 
buyers.     In  connection  with  this  action  of  the  secretary, 
two  questions  provoke  discussion  :  first,  whether  or  not  the 
gold  imported  in  this  f  rictionless  manner  would  have  come 
to  us  in  any  event.     Critics  of  the  secretary  believe  that 
exchange  would  have  continued  to  drop,  and  that  in  the 
end  the  gold  would  have  come.     The  advocates  of  auto- 
matic adjustment  must,  however,  recognize  that,  like  all 
markets,  the  exchange  market  is  ever  in  motion ;   at  every 


84  THE   CURRENCY   PROBLEM 

point  it  is  subject  to  a  multitude  of  tendencies  of  ever 
varying  force.  If  it  advances  a  point,  new  supplies  may 
be  attracted  and  a  part  of  the  existing  demand  may  be 
withdrawn ;  if  it  declines,  the  reverse  may  take  place : 
at  every  moment  new  elements  of  supply  and  demand  enter, 
and  if  gold  is  not  imported  to-day,  to-morrow  the  occa- 
sion and  the  need  of  it  may  have  passed.  On  the  other 
hand,  if  it  is  once  known  that  the  gold  import  point 
has  been  permanently  raised,  these  forces  will  inevitably 
assume  new  relations  to  the  market.  When  these  new 
relations  are  once  definitely  established,  we  shall  probably 
import  no  larger  amounts  of  gold  than  we  would  have  done 
under  the  old  conditions.  The  gold  imported  under  Sec- 
retary Shaw's  offer  might  not  have  come  to  us  without  his 
aid;  but,  if  his  aid  was  really  instrumental  in  drawing 
it  here,  it  was  because,  the  offer  being  unexpected,  the 
market  had  not  sufficient  time  to  adjust  itself  to  the  new 
conditions,  and  being  of  uncertain  duration,  it  was  im- 
possible to  operate  for  the  future  in  reliance  upon  their 
continuance. 

Secondly,  having  thus  imported,  by  the  frictionless 
method,  gold  that  we  will  assume  we  would  not  otherwise 
have  secured,  does  it  follow  that  we  shall  for  that  reason 
reexport  it?  By  no  means.  The  exchange  market, 
when  it  draws  away  from  the  gold  import  point,  does  not 
shoot  up  to  the  export  point;  it  runs  the  gauntlet  of  a 
thousand  tendencies  that  buffet  it  up  and  down,  and  it 
may  not  reach  the  export  point  for  many  months.  It  is 
like  the  valves  that  we  see  on  water  tanks  :  when  the  water 
falls  below  a  certain  level,  the  pump  is  started  automati- 
cally, and  when  the  water  rises  to  another  level,  the  pump  is 
automatically  cut  out.  Between  its  cutting  in  and  cutting 
out,  the  water  may  be  drawn  quite  low  and  then  again  be 
raised  by  rain  or  otherwise,  and  then  drawn  down  again; 
but  no  matter  how  near  the  water  may  get  to  either  limit, 


GOLD   MOVEMENTS   AND   FOREIGN   EXCHANGES     85 

provided  it  does  not  reach  that  limit,  many  causes  may 
interfere  to  postpone  its  setting  the  pump  in  motion. 

I  can  see  no  objection,  practical  or  theoretical,  to  the  f  ric- 
tionless  movement  of  gold.  Whatever  feeling  it  evoked 
abroad  would  vanish,  if  it  were  understood,  once  for  all, 
that  this  would  be  our  usual  custom.  By  establishing 
this  custom,  we  should  somewhat  narrow  the  extreme 
range  of  exchange  fluctuations;  but  this  in  itself  would 
be  an  advantage.  The  purpose  could  be  easily  accom- 
plished by  permitting  banks  to  count  as  part  of  their  re- 
serve gold  actually  in  transit :  it  is  immaterial  whether  that 
gold  be  in  the  banks'  vaults  or  only  on  its  way  there. 
Rarely  will  any  bank  be  so  hard  pressed  that  it  cannot 
spare  a  portion  of  its  reserve  for  a  week  or  two,  knowing 
that  it  will  be  received  at  the  end  of  that  time,  and,  more- 
over, a  bank  so  situated  that  it  could  not  spare  the  cash 
from  its  reserves  would  not  attempt  to  import  gold.  The 
one  real  risk  would  be  loss  in  transit,  and  that  risk  being 
protected  by  insurance,  the  only  risk  would  be  of  delay. 

This  automatic  import  and  export  of  gold  furnish  to  the 
currency  of  every  country  a  very  considerable  element  of 
automatic  elasticity.  France  and  Germany  have  other 
elements  of  elasticity  arising  from  the  note  issues  of  their 
government  banks ;  but  gold  movement  is  the  only  element 
of  elasticity  in  the  currency  of  Great  Britain,  Bank  of  Eng- 
land notes  being  merely  certificates  of  deposit  for  sov- 
ereigns held  on  storage,  except  the  fixed  amount  of 
.£18,450,000,  uncovered  notes. 

Our  currency  is,  therefore,  more  elastic  than  that  of 
Great  Britain,  for  we  have  the  elasticity  imparted  by  our 
national  bank-notes  —a  sluggish,  inert  elasticity  — the 
elasticity  of  an  old  rubber  band;  such  bands,  like  our 
national  bank-note  circulation,  will  expand  a  certain  lim- 
ited distance,  but  neither  the  old  rubber  bands  nor  our 
bank-note  circulation  will  contract.    Of  course,  with  a  vast 


86  THE    CURRENCY   PROBLEM 

country  and  huge  crops  raised  in  remote  sections,  our  cur- 
rency requirements  are  entirely  different  from  those  of 
Great  Britain.  Beyond  question  our  currency  machinery 
should  be  remodeled  and  improved;  but  recognition  of 
the  need  of  change  has,  to  many,  come  so  recently  and  so 
suddenly  that  we  are,  at  the  present  time,  in  greater  dan- 
ger from  hasty  and  unmatured  action  than  we  have  hitherto 
been  from  failure  to  act.  We  need  action,  enlightened 
action ;  but,  in  order  to  secure  it,  we  need,  first,  a  thorough 
understanding  of  the  requirements.  That  topic  in  its 
details  is  beyond  the  province  of  this  paper ;  but  a  word  on 
the  subject  is  proper  here,  because  consideration  of  the 
nature  of  those  requirements  follows  logically  on  the  dis- 
cussion of  elasticity  as  imparted  by  gold  movements. 
We  need  elasticity,  in  addition  to  that  imparted  by  the 
import  and  export  of  gold,  in  order  that  the  periodical, 
temporary,  hand-to-hand  currency  requirements  of  crop- 
moving  and  holiday  seasons  may  be  met  without  disturb- 
ing credit  lines;  but  this  elasticity  must  be  so  planned 
that  it  cannot  be  used,  except  perhaps  in  times  of  great 
emergency,  for  the  purpose  of  erecting  a  larger  credit 
structure  upon  our  cash  reserves.  It  is  my  opinion  that 
these  requirements  can  best  be  met  by  a  central  bank 
properly  organized  and  administered,  and  I  believe  that 
a  form  of  organization  can  be  devised  for  such  a  bank 
that  will  effectually  protect  it  from  the  danger  of  political 
control  or  influence. 

High  interest  rates,  like  high  temperatures  in  the  human 
body,  are  symptoms  of  disease,  and  when  they  show  them- 
selves, we  must  seek  to  cure  the  disease,  not  doctor  the 
symptoms.  Except  when  caused  by  need  of  currency  for 
hand-to-hand  purposes,  high  interest  rates  indicate  an 
overextension  of  credit  that  calls  for  contraction  and  liqui- 
dation, and  in  former  days  they  brought  about  that  con- 
traction and  liquidation.     During  the  last  few  years,  how- 


GOLD    MOVEMENTS   AND    FOREIGN   EXCHANGES     87 

ever,  high  interest  rates  have  failed  to  do  this,  because  the 
business  community  has  come  to  rely  more  and  more  upon 
Washington  intervention  to  keep  interest  rates  down. 
Accordingly,  in  the  belief  that  such  rates  would  prevail 
for  but  a  short  period,  business  men  have  been  willing  to 
pay  rates  that  a  few  years  ago  would  have  brought  about 
prompt  liquidation,  and  with  it,  relief.  Under  our  present 
awkward  currency  arrangements,  it  is  perfectly  proper 
that  the  Treasury  Department  should  in  slack  seasons 
gather  in  surplus  currency,  in  order  to  place  it  again  in 
circulation  at  crop-moving  seasons,  and  that  it  should  at 
other  times  redeposit  surplus  revenues  with  banks,  so  as 
not  to  cause  unnatural  contraction.  But  this  necessary 
Treasury  action  has  accustomed  us  to  look  to  Washington 
for  relief  from  high  money  rates,  however  caused,  with  the 
result  that  high  rates  have  for  the  last  few  years  lost  their 
terrors,  and  have  failed  to  bring  about  needed  liquidation. 
In  remodeling  our  currency,  we  must  devise  a  system 
which  provides  for  the  currency  requirements  of  crop- 
moving  seasons  without  liquidation  of  credit  lines,  and 
which  keeps  Treasury  money  in  the  channels  of  trade,  thus 
taking  away  the  power  of  the  Treasury  over  interest  rates. 
When  that  shall  have  been  brought  about,  interest  rates 
will  once  more  have  become  a  valuable  indication  of 
credit  conditions,  and  the  business  community  will  again 
heed  their  timely  warnings. 


THE   NEW   YORK   CLEARING   HOUSE 


BY 

WILLIAM   A.   NASH 


THE  NEW  YORK   CLEARING   HOUSE 

Words  of  Introduction,  as  Presiding  Officer 

I  appreciate  very  highly  the  honor  of  presiding  over 
this  meeting,  as  it  gives  me  an  opportunity  to  make  some 
personal  references  to  the  Clearing  House  of  this  city  and 
a  few  brief  comments  upon  some  phases  of  the  present 
state  of  affairs. 

I  feel  I  can  speak  more  freely  to  this  audience,  as 
through  the  suggestions  of  your  former  President  Low, 
the  bank  with  which  I  am  connected,  and  in  which  a 
large  number  of  the  students  of  Columbia  are  deposi- 
tors, opened  its  University  Branch  very  near  here.  If 
through  that  agency  I  have  in  any  way  assisted  in  the 
work  of  education  by  impressing  upon  those  young  men 
the  value  of  accuracy  and  the  wisdom  of  a  strong  cash 
reserve  as  leading  principles  of  commercial  morality,  I 
hope  I  shall  not  have  been  unworthy  of  being  named 
among  your  most  useful  professors  and  educators. 

It  is  very  easy  to  understand  the  keen  public  interest 
in  all  that  relates  to  clearing  houses  and  especially  the 
great  one  in  New  York  City.  Money  and  credit  are  two 
great  interests  that  come  home  to  our  business  and 
bosoms,  and  the  men  who  handle  them,  in  distinction 
from  those  who  talk  about  them,  are  the  subjects  of 
natural  curiosity. 

As  an  organization  of  power  and  influence  in  financial 
matters,  I  know  of  none  that  excels  or  equals  the  New  York 
Clearing  House.  It  has  its  usual  daily  duty  of  making 
the  practical  exchanges   between  the   banks,  by  which 

91 


92  THE   CURRENCY   PROBLEM 

your  check  arrives  for  payment  in  an  incredibly  and 
sometimes  uncomfortably  short  space  of  time,  and  it  has 
its  occasional  function  as  the  conservator  of  business 
interests  and  the  potent  agency  by  which  panics  are  stayed 
and  the  baleful  effects  of  public  excitement  are  arrested 
and  regulated.  Nine  times  in  its  history  the  Clearing 
House  has  come  to  the  rescue  of  the  business  community 
and  the  public  at  large  by  the  issue  of  loan  certificates, 
a  remedy  now  so  well  understood  that  its  aid  is  eagerly 
clamored  for  at  these  times  of  emergency.  These  loan 
certificates  constitute  the  only  experiment  in  asset  and 
emergency  currency  that  this  country  has  ever  had.  In 
the  half  century  of  its  existence  this  method  of  help  has, 
as  I  have  said,  been  used  nine  times,  and  without  the 
loss  of  a  single  dollar.  I  have  no  doubt  that  the  present 
issue  will  have  the  same  happy  solution.  I  had  the  honor 
recently  to  say  in  public  that  the  pointings  of  the  loan 
certificates  now  in  existence  all  over  the  country  wher- 
ever there  are  clearing  houses  were  unerringly  to  a  great 
central  bank. 

Without  enlarging  on  this  idea  at  this  time,  I  want  to 
emphasize  one  phase  of  such  a  central  bank  that  is  abso- 
lutely necessary  for  its  success.  I  refer  to  the  character 
of  its  management.  I  contend  that  only  the  men  who 
are  experts  in  banking  should  dominate  and  control  such 
an  institution.  I  draw  the  idea  from  my  experience  with 
the  men  who  have  so  brilliantly  served  the  public  in  the 
New  York  Clearing  House,  and  with  whose  grand  and 
unselfish  work  I  have  been  familiar  all  my  business  life. 

The  Clearing  House  Committee  is  composed  of  five 
bank  officers  and  the  president  of  the  Association.  The 
best  bankers  of  New  York  have  been  selected  for  mem- 
bership on  this  committee. 

The  Clearing  House  Committee  man  to  be  successful 
must  be  a  practical  banker,  of  broad  and  enlightened 


THE   NEW   YORK   CLEARING   HOUSE  93 

sympathies,  of  courage  and  unselfishness,  and  with 
promptness  and  decision  to  meet  unexpected  and  unusual 
conditions.  These  conditions  arise  no  more  suddenly  and 
in  no  more  perplexing  forms  than  in  financial  matters 
in  a  time  of  panic  and  disturbance.  The  emergency  is 
very  often  dramatic  and  intense,  and  I  do  not  wonder 
at  the  curiosity  and  interest  that  centers  around  the 
Committee  in  exigencies  similar  to  that  through  which  we 
have  just  passed.  I  have  been  filled  with  admiration 
at  the  foresight,  the  discretion,  and  the  boldness  of  these 
giants  of  finance,  in  the  several  crises  where  their  decisions 
and  judgments  have  had  far-reaching  results.  The  public 
confidence  in  this  Committee  has  never  been  impaired. 
I  should  like  to  point  to  some  of  the  men  who  are  honored 
and  cherished  for  their  services  in  the  Clearing  House. 
I  recall  the  magnetic  George  S.  Coe,  one  of  the  most 
resourceful  of  thinkers ;  Jacob  D.  Vermilye,  for  many 
years  the  Nestor  of  our  banking  fraternity;  George  G. 
Williams,  of  the  Chemical  Bank;  Edward  N.  Perkins,  of 
the  Importers  &  Traders'  Bank;  Henry  W.  Cannon,  of 
the  Chase,  and  later  his  successor  in  that  office,  A.  Barton 
Hepburn;  J.  Edward  Simmons,  of  the  Fourth  National 
Bank;  Dumont  Clarke,  of  the  American  Exchange;  James 
T.  Woodward,  of  the  Hanover;  and  Alexander  Gilbert,  of 
the  Market  and  Fulton,  now  president  of  the  Association. 
I  might  enlarge  the  list  very  greatly,  but  the  thoughts  of 
every  banker  turn  to  one  man,  who  during  a  long  term  of 
years  rendered  the  most  brilliant  and  useful  services  to 
the  banking  world  and  who  centered  in  himself  all  the 
admirable  traits  imaginable  in  a  master  of  finance.  I 
refer  to  the  late  Frederick  D.  Tappen,  whose  name  has 
been  on  our  lips  many  times  during  the  past  months. 
Genial,  magnetic,  courageous,  bold,  courteous,  and  dis- 
cerning, he  was  for  years  the  controlling  power  in  financial 
circles.     He  was  not  the  president  of  a  large  bank,  nor  a 


94  THE   CURRENCY   PROBLEM 

man  of  great  wealth,  but  held  his  control  of  affairs  by  the 
force  of  his  individuality,  his  personal  character,  and 
experience  as  a  banker.  The  prominence  and  power  of 
Mr.  Tappen  illustrates  the  leading  principle  of  Clearing 
House  control.  It  is  not  held  by  large  banks  but  by  large 
men.  Often  the  president  of  a  small  bank  has  been  the 
most  influential  in  our  councils,  and  the  character  and 
force  of  the  man  have  always  counted  more  than  the  size 
of  his  bank. 

When  the  present  financial  crisis  broke  upon  us,  it  was 
instantly  felt  that  the  growth  of  our  banking  interests 
demanded  a  larger  force  for  the  management  than  on 
previous  occasions,  and  the  Loan  Committee,  which  was 
the  Clearing  House  Committee,  was  authorized  to  associate 
five  other  bank  officers  to  assist  them.  It  gave  a  fine 
opportunity  of  initiating  the  younger  bank  officers  into 
the  working  force  of  the  Clearing  House,  and  the  result 
of  the  experiment  has  been  to  add  to  our  available  men  — - 
always  too  small — these  rising  men  in  our  profession. 
The  Chairman  of  that  Associated  Committee  is  the  speaker 
of  the  afternoon.  He  is  not  only  practically  conversant 
with  Clearing  House  work,  but  his  book  on  clearing  houses 
is  a  standard  work  on  the  subject.  The  Clearing  House 
Committee  is  under  great  obligations  to  the  committee 
over  which  he  has  presided  so  ably.  I  have  the  pleasure 
of  presenting  to  you  Mr.  James  G.  Cannon,  Vice-President 
of  the  Fourth  National  Bank  of  New  York. 


CLEARING   HOUSES   AND   THE    CURRENCY 

BY 

JAMES   G.    CANNON 


CLEARING  HOUSES  AND  THE  CURRENCY 

The  Supreme  Court  of  one  of  our  states  has  defined 
a  Clearing  House  as  "  an  ingenious  device  to  simplify  and 
facilitate  the  work  of  the  banks  in  reaching  an  adjustment 
and  payment  of  the  daily  balances  due  to  and  from  each 
other  at  one  time  and  in  one  place  on  each  day."  In 
practical  operation,  it  is  a  place  where  all  the  representa- 
tives of  the  banks  in  a  given  city  meet,  and  under  the 
supervision  of  a  competent  committee  or  officer,  selected 
by  the  associated  banks,  settle  their  accounts  with  each 
other,  and  make  or  receive  payment  of  balances,  and  so 
"clear"  the  transactions  of  the  day  for  which  the  settle- 
ment is  made. 

But  we  must  go  farther  than  this,  for  though  originally 
designed  as  a  labor-saving  device,  the  Clearing  House  has 
expanded  far  beyond  those  limits,  until  it  has  become  a 
medium  for  united  action  among  the  banks  in  ways  that 
did  not  exist  even  in  the  imagination  of  those  who  were 
instrumental  in  its  inception.  A  Clearing  House,  there- 
fore, may  be  defined  as  a  device  to  simplify  and  facilitate 
the  daily  exchanges  of  items  and  settlements  of  balances 
among  the  banks,  and  a  medium  for  united  action  upon 
all  questions  affecting  their  mutual  welfare. 

The  clearing  houses  in  the  United  States  may  be 
divided  into  two  classes,  the  sole  function  of  the  first  of 
which  consists  in  clearing  notes,  drafts,  checks,  bills  of 
exchange,  and  whatever  else  may  be  agreed  upon;  and 
the  second  of  which,  in  addition  to  exercising  the  functions 
of  the  class  just  mentioned,  prescribes  rules  and  regulations 
for  the  control  of  its  members  in  various  matters,  such  as 
h  97 


98  THE   CURRENCY   PROBLEM 

fixing  uniform  rates  of  exchange,  interest  charges,  collec- 
tions, etc. 

Clearing  houses  may  also  be  divided  into  two  classes 
with  reference  to  the  funds  used  in  settlement  of  balances  : 
first,  those  clearing  houses  which  make  their  settle- 
ment of  balances  entirely  on  a  cash  basis,  or,  as  stated  in 
the  decision  of  the  Supreme  Court  above  referred  to, 
"by  such  form  of  acknowledgment  or  certificate  as  the 
associated  banks  may  agree  to  use  in  their  dealings  with 
each  other  as  the  equivalent  or  representative  of  cash"; 
and  second,  those  clearing  houses  that  make  their  set- 
tlements by  checks  or  drafts  on  large  financial  centers. 

The  primary  object  of  a  Clearing  House  is,  as  stated, 
the  exchange  of  checks  and  drafts  between  the  banks 
associated  together  for  that  purpose,  and  the  settlement  of 
balances  resulting  from  such  exchanges ;  but  this  is  not 
the  only  function  exercised.  As  already  shown,  this 
single  function  constitutes  a  Clearing  House  of  the  first 
class,  while  the  addition  of  other  functions  puts  the 
organization  into  another  class.  The  tendency  has  been 
marked,  especially  in  recent  years,  to  include  within  the 
legitimate  field  of  clearing  houses  all  questions  affecting 
the  mutual  welfare  of  the  banks  and  the  community  as  a 
whole.  The  bankers  west  of  the  Mississippi  have  given 
to  the  country  the  most  striking  examples  of  the  pos- 
sibilities of  clearing  houses  exercising  various  special 
functions,  while  the  great  associations  of  the  East,  and 
especially  that  of  New  York,  have  exemplified  the  utility 
and  value  of  Clearing  House  loan  certificates. 

The  most  important  of  the  special  functions  of  a  Clear- 
ing House  are :  (a)  the  extending  of  loans  to  the  govern- 
ment, (b)  mutual  assistance  of  the  members,  (c)  fixing 
uniform  rates  of  interest  on  deposits,  (d)  fixing  uniform 
rates  of  exchange  and  of  charges  on  collections,  (e)  the 
issue  of  Clearing  House  loan  certificates. 


CLEARING   HOUSES   AND   THE    CURRENCY  99 

Less  than  a  decade  after  the  inauguration  of  the 
Clearing  House  system  in  America,  the  Civil  War  broke 
out  and  threw  the  government  into  a  condition  of  acute 
financial  embarrassment.  The  ordinary  sources  of  income 
were  insufficient  to  meet  the  demands  of  the  approaching 
crisis.  Thereupon  the  banks,  members  of  the  clearing 
houses  in  New  York  and  Boston,  responded  with  prac- 
tical unanimity  to  the  call  of  the  government  for  loans, 
by  which  the  latter  was  enabled  to  put  armies  in  the 
field  and  to  maintain  the  struggle  for  national  unity. 

In  times  of  panic,  it  is  not  infrequently  the  case  that  a 
bank  in  good  standing  becomes  temporarily  embarrassed. 
Unfortunate  report  may  cause  a  run  upon  it,  and,  being 
unable  to  call  in  a  sufficient  amount  of  its  outstanding 
loans  to  meet  the  demands  of  its  frightened  depositors, 
it  must  either  secure  a  loan  or  fail.  In  such  an  emer- 
gency, the  other  members  of  the  Clearing  House  are  usually 
willing  to  render  assistance  until  the  strain  is  relaxed. 
To  secure  such  aid,  however,  a  bank  must  be  sound  in  its 
management  and  of  good  repute  in  every  respect;  other- 
wise, the  members  of  the  Clearing  House  are  likely  to 
decline  assistance,  being  quite  willing  to  get  rid  of  a  weak 
and  ill-managed  member. 

Another  of  the  special  functions  of  a  Clearing  House  is 
the  fixing  of  uniform  rates  of  interest  on  deposits.  In 
some  associations  the  legality  of  such  action  is  still  re- 
garded as  a  moot  question,  and  hence  they  are  reluctant 
to  enforce  such  a  rule.  Other  associations  have  not 
hesitated,  however,  to  regulate  their  members  on  this 
point.  As  early  as  1881,  the  rates  of  interest  were  agreed 
upon  in  Buffalo,  and  were  observed  practically  without 
fraction  or  violation,  for  some  nine  years  thereafter. 
They  were  broken  at  last  only  because  of  their  non- 
observance  by  new  banks,  which  at  the  outset  refused  to 
become  members  of  the  Clearing  House  organization. 


100         THE  CURRENCY  PROBLEM 

Still  another  of  the  special  functions  which  I  have 
mentioned  is  the  fixing  of  uniform  rates  of  exchange  and 
of  charges  on  the  collection  of  items.  In  1881,  also  in 
Buffalo,  a  prominent  banker  in  that  city  succeeded  in 
uniting  the  banks  on  rates.  The  promoter  of  the  enter- 
prise, though  well  known  for  rate-cutting,  was  a  successful 
banker,  and  had  always  been  able  to  meet  competition 
successfully.  Hence,  when  he  proposed  a  uniform  rate 
system,  the  other  banks  were  only  too  glad  to  consider 
his  propositions.  The  rates  were  not  high,  but  were 
arranged  so  as  to  do  justice,  so  far  as  possible,  to  the 
banks  on  the  one  hand  and  the  depositors  on  the  other, 
and  so  satisfactory  was  the  new  regime  that  it  remained 
in  harmonious  operation  for  nearly  nine  years.  As  was 
the  case  with  the  agreement  fixing  the  uniform  rates  of 
interest  on  deposits,  the  non-observance  of  the  collection 
exchange  rules  by  the  new  banks  made  its  continuance  an 
injustice  to  the  member  banks. 

The  matter  of  collecting  checks  and  other  items  outside 
of  the  city  of  New  York  is  a  subject  that  for  many  years 
had  received  most  careful  thought  on  the  part  of  the 
officers  and  members  of  the  New  Y^ork  Clearing  House. 
An  amendment  to  the  constitution  was  adopted  March  13, 
1899,  directly  bearing  upon  this  point  and  embodying  a 
policy  that  was  so  radical  as  not  only  to  attract  attention 
throughout  the  entire  financial  community,  but  at  the 
outset  to  incite  more  or  less  opposition.  As  time  has 
passed,  however,  the  justness  of  the  provisions  has  become 
apparent,  and  the  business  community  has  acquiesced  in 
what  is  manifestly  an  entirely  reasonable  measure.  The 
clearing  houses  of  Boston  and  Chicago  have  since  put 
rules  of  this  character  in  force.  Briefly,  its  important 
provisions  are  as  follows :  after  naming  certain  of  the 
larger  cities  in  the  East  as  points  upon  which  it  is  optional 
as  to  whether  the  banks  make  a  charge  for  collecting 


CLEARING   HOUSES   AND   THE    CURRENCY        101 

items,  it  specifies  certain  states,  mostly  east  of  the  Missis- 
sippi, and  including  Virginia  and  West  Virginia  on  the 
south,  upon  which  a  charge  of  not  less  than  one-tenth 
of  one  per  cent  must  be  made  by  the  collecting  bank,  and 
upon  all  other  states  in  the  Union,  and  for  items  upon 
Canada,  the  collecting  banks  shall  charge  not  less  than 
one-quarter  of  one  per  cent  of  the  amount  of  the  items, 
respectively.  The  amendment  also  provides  penalties  for 
the  violation  of  its  provisions,  the  penalty  for  the  first 
violation  being  a  five-thousand-dollar  fine,  and  in  case 
of  a  second  violation,  any  collecting  bank  may  be  expelled 
from  the  association. 

The  daily  routine  of  the  New  York  Clearing  House  is  as 
follows :  each  business  day,  at  ten  o'clock,  the  exchanges 
take  place  between  the  banks.  The  two  essential  repre- 
sentatives of  each  bank  are  the  "delivery  clerk"  and 
the  "settling  clerk."  The  former  delivers  the  packages 
brought,  and  the  latter  receives  the  return  packages  from 
the  messengers  of  the  other  banks. 

Each  member  sends  its  items  for  the  other  banks  made 
out  separately  and  inclosed  in  envelopes,  with  the  amounts 
listed  on  the  "exchange  slip"  attached  to  the  outside. 
On  their  arrival  at  the  Clearing  House,  the  settling  clerks 
furnish  the  proof  clerk,  sitting  at  his  desk  in  the  manager's 
gallery,  with  the  "first  ticket,"  upon  which  is  entered 
the  amount  brought  or  "credit  exchange,"  and  which 
the  latter  transcribes  on  the  Clearing  House  proof  under 
the  head  of  "Banks  Cr."  The  total  of  the  amounts  thus 
brought  by  the  several  clerks  constitutes  the  right-hand 
main  column  of  that  sheet. 

The  bank  representatives  usually  gather  at  about  a 
quarter  to  ten,  and  a  few  minutes  later  the  manager 
appears  in  his  gallery.  At  one  minute  before  ten  he  sounds 
a  gong  as  a  signal  for  each  of  the  clerks  to  station  himself 
in  his  proper  place.     Each  bank's  settling  clerk  has  his 


102         THE  CURRENCY  PROBLEM 

own  desk,  back  of  which  he  stands,  while  the  delivery 
clerks  form  on  the  outside  with  their  exchanges  carried 
in  a  box.  The  delivery  clerks  arrange  themselves  in 
consecutive  order,  and  stand  ready  for  delivery  as  they 
pass  along  the  counter.  They  carry  with  them  "de- 
livery clerk's  receipts,"  or  little  slips  containing  the 
amounts  for  each  bank  arranged  in  order,  upon  which 
the  several  settling  clerks,  or  their  assistants,  give  receipts 
for  the  packages  delivered. 

All  are  now  in  a  position  for  the  exchange.  The 
manager  calls  "ready,"  and  promptly  at  ten  o'clock  he 
sounds  the  gong  again  and  the  delivery  of  the  packages 
begins.  He  looks  down  four  columns  of  men,  moving 
simultaneously  like  a  military  company.  At  the  start 
each  advances  to  the  desk  in  front  where  his  first  delivery 
is  to  be  made.  He  deposits  the  package  of  items  and  also 
the  receipt  slip,  on  which  the  assistant  of  the  settling  clerk 
(or  in  the  case  of  small  banks  the  settling  clerk  himself) 
writes  his  initials  opposite  the  amount  of  the  package 
delivered  in  the  blank  space  provided  for  that  purpose. 
At  the  same  time,  in  an  opening  in  the  desk,  which  serves 
for  that  purpose,  he  deposits  a  small  ticket  containing  the 
amount  of  the  package.  If  correct,  it  must  agree  with 
the  amount  listed  on  the  "exchange  slip."  This  process 
is  repeated  at  the  desk  of  each  of  the  banks,  each  delivery 
clerk  making  the  complete  circuit  in  ten  minutes  to  the 
point  from  which  he  started. 

Being  now  at  liberty,  each  delivery  clerk  takes  back  to 
his  bank  the  exchanges  deposited  by  the  other  messengers, 
while  the  settling  clerks  remain  until  the  proof  is  made. 

The  settling  clerks,  immediately  upon  the  completion  of 
the  exchange  of  packages,  sum  up,  as  quickly  as  possible, 
the  amounts  entered  on  their  statements  under  the  head 
of  "Banks  Dr."  Upon  ascertaining  the  total,  they  make 
out  another  ticket  containing  the  credit  and  debit  ex- 


CLEARING   HOUSES   AND   THE   CURRENCY        103 

changes  and  the  balance,  and  send  the  same  to  the 
"  proof  clerk,"  who  transcribes  the  debit  exchange  under 
the  head  of  "Banks  Dr."  (the  credit  exchange  having 
already  been  entered)  and  the  balance  on  the  credit 
side  or  debit  side,  as  the  case  may  be. 

While  this  is  being  done,  the  settling  clerks  are  check- 
ing back  from  the  small  tickets,  to  ascertain  whether  the 
amounts  agree  with  the  amounts  listed  on  their  state- 
ments from  the  exchange  slips.  By  this  time  the  proof 
clerk  has  footed  the  four  columns  on  his  sheet,  viz.,  the 
credit  and  debit  exchanges  and  the  credit  and  debit 
balances.  If  the  former  two  agree  with  the  latter  two, 
the  work  is  correct,  and  the  result  is  announced  by  the 
manager,  who  then  calls  off  credits  and  debits. 

Thus  far  no  money  has  entered  into  the  transaction. 
Checks,  notes,  drafts,  and  other  items  have  passed  through 
the  exchanges,  but  as  yet  no  occasion  has  arisen  for  the 
use  of  a  single  penny.  Evidently,  however,  the  clearing 
is  not  yet  complete.  Each  member  has  in  its  possession 
paper  drawn  upon  itself  which  the  other  members  have 
credited  on  their  books,  and  likewise  each  member  has 
given  in  exchange  to  each  of  the  other  members  paper 
drawn  upon  them  respectively  and  which  it  has  credited 
upon  its  own  books.  But  the  possibility  is  very  remote 
that  the  amounts  of  the  items  delivered  by  any  member 
to  the  other  banks  will  exactly  balance  the  sum  total 
received  from  them.  Indeed,  so  slight  is  the  chance 
of  such  an  agreement,  that  in  the  whole  history  of  the 
Association  there  has  not  been  a  single  instance  of  this 
kind,  although  the  approach  on  one  occasion  was  within 
one  cent  of  an  exact  exchange.  Hence,  each  day  after  the 
exchange,  the  general  proof  will  show  a  debit  on  the  part 
of  some  banks  and  a  corresponding  credit  on  the  part  of 
others.  To  complete  the  clearings,  therefore,  it  is  neces- 
sary for  the  banks  to  settle  these  balances. 


104         THE  CURRENCY  PROBLEM 

Accordingly,  before  half-past  one  o'clock,  each  debtor 
bank,  in  compliance  with  the  requirement  of  the  con- 
stitution, pays  into  the  Clearing  House  the  amount  of 
its  debtor  balance,  and  obtains  a  receipt  for  the  same, 
signed  by  the  assistant  manager.  After  half-past  one, 
the  creditor  banks  receive  at  the  Clearing  House  their 
respective  balances,  and  give  their  receipt  for  the  same 
in  a  book  provided  for  that  purpose ;  but  in  no  case  can 
a  creditor  bank  receive  its  balance  until  all  the  debtor 
banks  have  paid  in. 

With  the  exception  of  fractional  amounts,  balances  are 
settled  with  legal-tender  notes,  gold  coin,  United  States 
and  Clearing  House  gold  certificates,  and  during  panic 
times  with  Clearing  House  loan  certificates. 

By  resolution  and  amendment,  covering  nearly  the 
whole  period  of  its  history,  the  New  York  Clearing  House 
Association  has  been  developing  the  present  system  for 
regulating  the  conduct  of  those  outside,  or  non-member 
institutions,  which  enjoy  the  privileges  of  the  Clearing 
House.  No  other  Association  in  the  United  States  even 
approximates  that  of  New  York  in  the  rigorous  conditions 
it  imposes  upon  non-member  banks,  and  in  the  consequent 
safeguards  it  has  thrown  around  its  members.  This 
subject  of  members  clearing  for  outside  institutions  is 
one  that  is  just  now  receiving  a  great  deal  of  attention 
from  the  Clearing  House  authorities.  A  member  bank, 
being  responsible  to  the  Association  for  the  clearances 
of  a  non-member  bank  for  at  least  twenty-four  hours  after 
notice  of  ceasing  to  clear  has  been  given,  it  has  always 
been  customary  for  the  clearing  bank  to  take  securities 
from  the  non-member  institution  for  which  it  clears,  to 
provide  against  the  contingency  of  loss ;  but  on  account 
of  complications  arising  from  the  failure  of  one  or  two 
state  institutions,  where  large  blocks  of  the  most  desirable 
assets  were  found  to  be  in  the  possession  of  the  clearing 


CLEARING   HOUSES   AND   THE   CURRENCY        105 

bank,  to  cover  their  clearances,  a  law  was  passed  by  the 
Legislature,  called  the  Saxe  Bill,  which  states  in  brief 
that  the  effect  of  the  statute  is  to  forbid  the  enforcement 
of  any  lien  against  the  moneys  or  securities  so  deposited 
for  any  clearances  made  after  notice  or  knowledge  that 
the  banking  superintendent  has  taken  possession  of  a 
non-member  institution.  Hereafter,  therefore,  the  former 
validity  of  a  lien  of  this  character  is  absolutely  annulled, 
so  far  as  respects  the  assets  of  a  state  bank  or  individual 
banker.  It  appears,  however,  that  where  such  clearing 
is  made  for  a  trust  company  non-member,  this  statute 
will  not  apply,  since  the  words  used  are  merely  state  bank 
or  individual  banker,  and  since  section  2  of  the  banking 
law  does  not  include  a  trust  company  in  its  definition 
of  the  terms  "bank"  or  "individual  banker." 

This  makes  it  extremely  dangerous  for  bank  members  of 
the  Association  to  clear  for  non-member  banks,  organized 
under  the  laws  of  the  state  of  New  York,  and  this  statute 
might  some  day  be  construed  by  the  courts  to  apply  also 
to  the  trust  companies.  This  is  one  of  the  things  that 
has  helped  the  agitation  for  the  admission  of  the  trust 
companies  to  the  privileges  of  the  Clearing  House,  and  at 
a  meeting  of  the  Association,  held  on  January  13,  1908, 
a  resolution  was  adopted  authorizing  the  admission  of 
trust  companies  to  full  membership  in  the  Clearing 
House,  provided  they  will  keep  a  reserve  in  cash  equal  to 
twenty-five  per  cent  of  their  deposits.  Full  membership 
carries  with  it,  besides  the  privilege  of  clearing  checks, 
etc.,  direct,  the  right  of  having  representatives  on  com- 
mittees, a  voice  in  the  entire  management  of  the  Associa- 
tion, and  the  privilege  of  taking  out  Clearing  House 
loan  certificates  when  they  are  authorized.  At  the  same 
meeting  an  amendment  was  offered,  but  laid  over  for 
three  months,  providing  for  a  new  class  of  members  in 
the  Association,  to  be  known  as  associate  members.     Such 


106         THE  CURRENCY  PROBLEM 

members  would  have  all  the  privileges  and  benefits  of  the 
Clearing  House,  except  a  voice  in  its  management,  and 
would  be  obliged  to  keep  a  reserve  on  their  deposits  of 
only  fifteen  per  cent. 

Until  January  16,  1908,  there  was  nothing  in  the  con- 
stitution of  the  New  York  Clearing  House  requiring  its 
members  to  keep  a  cash  reserve.  The  twenty-five  per 
cent  reserve  which  is  so  often  spoken  of  in  connection  with 
the  bank  statement  was  kept  by  the  banks  without  any 
law  of  the  Clearing  House.  At  a  meeting  of  the  Asso- 
ciation, held  on  January  16th,  an  amendment  to  the  con- 
stitution was  adopted,  requiring  that  thereafter  all  mem- 
bers of  the  Association,  or  those  who  should  thereafter 
become  members,  should  maintain  in  their  vaults  a  cash 
reserve  of  twenty-five  per  cent  of  their  deposits.  By 
compelling  all  of  its  members  to  keep  a  twenty-five  per 
cent  reserve,  and  by  making  this  reserve  a  condition  to 
the  admission  to  the  privileges  of  the  Clearing  House,  of 
trust  companies  as  well  as  banks,  the  general  banking 
situation  in  this  city  will  be  greatly  strengthened. 

By  the  admission  of  the  trust  companies  to  full  or 
associate  membership  in  the  Clearing  House,  the  bank 
statement,  which  is  published  every  Saturday,  will  be 
much  more  comprehensive  than  ever  before,  because  it 
will  henceforth  include  nearly  all  the  financial  institutions 
in  the  city. 

There  is  much  to  be  said  on  this  subject  of  the  bank 
statement.  As  before  stated,  it  is  the  custom  in  New 
York  City  to  publish  the  details  of  the  banks'  standing 
each  Saturday  noon,  and  in  many  instances,  because  of 
this  incompleteness,  I  believe  it  is  a  disturbing  factor. 
Boston  and  Philadelphia  also  publish  their  bank  state- 
ments in  detail,  but  Chicago  has  never  done  more  than 
give  the  totals  to  the  public.  Many  people  find  fault  with 
the  bank  statement  because  it  is  made  up  of  averages ;  but 


CLEARING  HOUSES  AND   THE   CURRENCY         107 

if  they  would  only  stop  to  consider,  they  would  readily 
see  that  that  is  the  only  way  a  statement  could  be  made  up 
that  would  not  be  a  disturbing  factor  to  the  financial 
situation.  If  a  statement  was  published  of  the  condition 
of  each  bank  in  the  Clearing  House  as  it  stood  at  the  close 
of  business  on  Friday  afternoons,  it  would  necessitate 
the  very  heavy  calling  of  loans  on  Thursday  and  Friday 
preparatory  to  such  a  statement,  and  Saturday,  being  a 
half  holiday,  the  banks  would  be  obliged  to  carry  very 
large  sums  of  money  over  the  week  end;  in  fact,  the 
whole  business  of  banking  would  be  disarranged,  and 
money  would  always  be  easier  at  the  beginning  of  the 
week  than  at  the  end.  With  the  present  system  of  aver- 
ages, if  through  some  combination  of  circumstances  a 
bank  swings  under  its  required  reserve  in  the  beginning 
of  the  week,  it  knows  that  by  calling  a  few  loans  each  day 
it  has  several  days  in  which  to  readjust  itself,  and  in  that 
way  secure  a  more  or  less  satisfactory  average  for  the 
week.  I,  therefore,  believe  that  a  bank  statement  based 
upon  averages  is  the  only  one  to  be  given  to  the  public. 
As  a  guide,  however,  to  the  Clearing  House  authorities, 
but  not  for  publication,  possibly  a  statement  showing 
the  actual  condition  of  the  banks  at  the  close  of  business 
on  Friday  might  be  of  great  assistance  as  indicating 
whether  the  statement  had  been  made  up  on  rising  or 
falling  averages. 

We  come  finally  to  the  subject  of  Clearing  House  loan 
certificates,  which  has  been  receiving  much  attention  of 
late,  and  which  deserves   especial  mention. 

Clearing  House  loan  certificates  may  be  defined  as 
temporary  loans  made  by  the  banks  associated  together 
as  a  Clearing  House  Association,  to  the  members  thereof, 
for  the  purpose  of  settling  Clearing  House  balances. 

To  obtain  an  intelligent  understanding  of  the  real 
character  and  purpose  of  such  certificates,  it  will  be  well 


108         THE  CURRENCY  PROBLEM 

to  consider  for  a  moment  the  circumstances  under  which 
they  are  issued.  In  the  course  of  the  last  hundred  years, 
the  United  States  has  undergone  periodical  derangements 
of  business  affairs,  when  confidence  was  displaced  by 
mistrust,  when  the  payment  of  debts  became  difficult, 
when  property  values  declined  and  business  houses 
failed,  when  industry  and  trade  were  paralyzed  and 
general  stagnation  ensued  in  all  lines  of  enterprise.  In 
such  times,  depositors  in  banks,  stricken  with  fear  and 
sometimes  pressed  with  need,  drew  out  their  deposits, 
in  many  instances  to  such  an  extent  as  to  render  it  difficult 
or  even  impossible  for  the  banks  to  contract  their  loans 
sufficiently  to  meet  the  demands  thus  made  upon  them. 
Under  our  present  currency  system  there  is  no  method 
of  expanding  the  money  volume  as  occasion  demands, 
whereby  the  banks  can  continue  their  usual  loans  and 
discounts  and  thus  prevent  a  panic,  with  all  its  evil 
consequences.  Hence  it  is  left  in  a  large  measure  to  the 
financiers  of  each  community  to  work  out  their  own 
remedy,  supplemented  by  such  mutual  assistance  as  a 
courteous  regard  for  each  other  may  dictate,  or  as  business 
relations  may  demand. 

Quick  to  see  the  deficiency  in  our  currency  system,  and 
the  desirability  of  in  some  way  supplying  it,  the  bankers 
of  New  York,  over  forty  years  ago,  devised  the  scheme  of 
issuing  Clearing  House  loan  certificates  as  a  method  of 
relief  from  monetary  stringencies.  Subsequently,  nearly 
all  the  clearing  houses  in  the  great  centers  adopted  the 
same  device,  and  by  their  heroic  resort  to  the  measure,  they 
have  at  different  times  relieved  the  community  of  untold 
disaster,  for  which  invaluable  service  they  have  justly 
received  the  grateful  recognition  of  the  entire  country. 

The  great  value  of  Clearing  House  loan  certificates 
consists  in  the  fact  that  they  take  the  place  of  money  in 
settlements  at  the  Clearing  House,  and  hence  save  the  use 


CLEARING   HOUSES   AND   THE    CURRENCY        109 

of  so  much  actual  cash,  leaving  the  amount  to  be  used  by 
the  banks  in  making  loans  and  discounts  and  in  meeting 
other  obligations.  The  volume  of  currency,  to  all  intents 
and  purposes,  is  expanded  by  this  means  to  the  full  amount 
of  the  certificates  issued. 

The  loan  certificates  are  taken  out  by  the  Clearing 
House  members  through  loan  committees  especially  ap- 
pointed, and  are  used,  as  a  rule,  only  in  the  payment 
of  balances  among  the  associated  banks.  Thus,  when 
the  stringency  in  the  money  market  seems  sufficient  to 
demand  it,  the  Clearing  House  Association  meets  and 
appoints  a  committee,  called  the  loan  committee,  con- 
sisting usually  of  five  bank  officers,  to  act  in  concurrence 
with  the  president  of  the  Clearing  House  Association, 
who  serves  as  ex-officio  member.  It  is  the  duty  of  such 
committee  to  meet  each  morning  at  the  Clearing  House 
and  examine  the  collateral  offered  as  security  by  the 
banks,  and  to  issue  loan  certificates  thereon  in  such 
denominations  and  proportions  to  collaterals  deposited 
as  may  be  agreed  upon.  In  the  history  of  the  past,  the 
denominations  have  varied  from  twenty-five  cents  to 
twenty  thousand  dollars  in  the  different  associations,  and 
in  proportion  varying  from  fifty  dollars  to  one  hundred 
dollars  of  certificates  to  one  hundred  dollars  of  collateral 
deposited. 

These  loan  certificates  bear  interest  at  rates  varying 
from  six  to  nine  per  cent  per  annum,  payable  by  the 
banks  to  which  they  are  issued  to  the  banks  receiving 
such  certificates  in  settlement  of  daily  balances.  Hence 
the  interest  charged  against  certain  banks  must  exactly 
equal  and  offset  that  credited  to  certain  other  banks. 
The  aim  is  to  fix  the  rate  sufficiently  high  to  insure  the 
retirement  of  the  certificates  as  soon  as  the  emergency 
which  called  them  forth  has  passed  by.  As  a  rule  they 
are  retired  by  the  banks  which  take  them  out  as  soon 


110         THE  CURRENCY  PROBLEM 

as  they  have  obtained  sufficient  cash  to  meet  their  daily 
obligations.  Notice  is  given  by  the  debtor  banks  to  the 
committee  calling  for  such  certificates  as  they  wish  to 
retire,  and  the  committee  gives  notice  to  the  banks 
holding  the  same,  stating  that  the  interest  will  cease  after 
a  specified  date.  In  due  course,  the  holders  send  the 
certificates  through  the  Clearing  House  for  redemption. 
Upon  the  retirement  of  the  certificates,  the  collateral 
deposited  as  security  is  surrendered  by  the  committee 
in  the  same  proportion  to  certificates  surrendered  as 
was  required  for  deposit. 

The  first  issue  of  Clearing  House  loan  certificates  was 
made  in  1860,  and  the  last  is  still  outstanding.  These 
certificates  have  been  more  extensively  and  generally 
used  in  the  panic  of  1907  than  in  any  previous  panic, 
and  there  has  been  developed  a  tendency  to  use  them, 
in  the  smaller  denominations,  as  a  circulating  medium 
throughout  the  country,  to  take  the  place  of  currency 
that  has  been  withdrawn  from  circulation ;  and  I  believe 
that  one  of  the  most  potent  factors  in  stopping  the  force 
of  the  recent  panic  was  the  issue  of  these  Clearing  House 
loan  certificates  by  the  clearing  houses  throughout  the 
country. 

Owing  to  a  popular  misconception  of  the  character 
and  purpose  of  these  loan  certificates,  much  adverse 
criticism  has  been  indulged  in,  especially  in  1893,  on  the 
ground  that  such  issues  were  made  in  violation  of  the 
ten  per  cent  prohibitive  tax  on  bank-note  currency, 
other  than  national-bank  note  circulation.  Such  objec- 
tions were  based  on  the  assumption  that  Clearing  House 
loan  certificates  were  a  form  of  national  bank  currency 
—  an  assumption  which  is  ill  founded  in  both  theory  and 
fact.  The  certificates  were  and  are  essentially  temporary 
loans  made  by  the  banks  banded  together  as  a  Clearing 
House  Association  to  the   members  of  such  Association, 


CLEARING   HOUSES   AND   THE   CURRENCY        111 

and  were  available  to  such  banks  only  for  the  purpose  of 
settling  balances  due  from  and  to  each  other.  In  the 
words  of  the  Comptroller  of  the  Currency,  they  are  but 
due  bills,  and  their  sole  function  consists  in  discharging 
obligations  at  the  Clearing  House.  In  New  York  an 
attempt  on  the  part  of  a  Clearing  House  bank  to  use 
them  otherwise  would  insure  a  fine  and  other  penalties 
provided  in  the  rules  governing  the  Association.  The 
courts  have  decided  that  they  shall  not  be  regarded  as 
money,  and  the  imposition  of  a  tax  upon  them,  therefore, 
would  be  a  serious  blow  to  one  of  the  most  effective  and 
ingenious  contrivances  for  the  delivery  of  the  country  from 
the  throes  of  panic  that  has  yet  been  devised. 

In  reading  the  newspaper  discussions  in  connection 
with  the  so-called  Aldrich  Currency  Bill,  which  is  now 
before  Congress,  I  notice  that  it  has  been  suggested  that 
the  issuance  of  Clearing  House  loan  certificates  should 
be  prohibited  by  law.  It  does  not  seem  possible  that 
any  student  of  finance  who  is  familiar  with  the  uses  of 
these  certificates  could,  for  one  moment,  make  such  a 
recommendation.  Had  it  not  been  for  the  issuance  of 
Clearing  House  loan  certificates  by  the  associated  banks 
of  New  Yrork  during  the  recent  crisis,  we  should  not  have 
been  able  to  import  any  considerable  amount  of  gold 
from  Europe.  Very  few  people  realize  that  in  importing 
gold  it  is  necessary  to  create  a  credit  on  the  books  of  a 
bank,  upon  which  the  gold  importer  may  draw,  through 
the  Clearing  House,  in  payment  of  the  cable  transfers  and 
bills  of  exchange  necessary  to  cover  the  amount  of  gold 
to  be  brought  over.  Clearing  House  loan  certificates 
enabled  the  banks  to  make  these  credits,  and  that  is  the 
reason  we  were  able  to  import  such  a  large  volume  of  gold 
during  the  past  few  months.  The  banks  extended  their 
facilities  to  the  importers,  who  brought  over  the  gold  on 
"trust   receipts,"  which   were   deposited  with  the   banks 


112         THE  CURRENCY  PROBLEM 

as  collateral  security,  pending  the  arrival  of  the  gold. 
These  issues  of  Clearing  House  loan  certificates  also 
provided  credit  with  which  the  banks  were  enabled  to 
buy  and  pay  for  large  amounts  of  the  Panama  bonds  and 
United  States  certificates  of  indebtedness  which  were 
issued  by  the  government  as  a  measure  of  relief.  The 
bonds  and  certificates  so  purchased  were  then  placed  on 
deposit  in  Washington,  as  security  for  new  national- 
bank  note  circulation.  Under  the  present  laws,  and 
according  to  the  provisions  of  the  Aldrich  Bill,  so  called, 
it  is  imperative  that  the  banks  should  first  buy  bonds, 
send  them  on  to  Washington,  and  wait  for  its  preparation 
before  they  can  receive  the  new  circulation.  The  credit 
to  purchase  these  bonds,  in  times  of  panic,  must  be 
obtained  in  some  way,  as  there  would  be  no  sense  in 
paying  out  reserve  money  to  buy  bonds  for  circulation, 
and  receive  no  return  on  the  same  for  a  week  or  ten  days, 
and  then  only  in  national-bank  notes  which  cannot  be 
counted  as  reserve.  The  custom  has  grown  up  of  late  of 
national  banks  borrowing  bonds,  which  they  have  de- 
posited with  the  Treasurer  of  the  United  States  as 
security  for  government  deposits,  and  for  the  purpose  of 
releasing  government  bonds  for  circulation.  I  do  not 
believe  that  the  National  Bank  Act  ever  contemplated 
anything  of  the  kind,  and  I  think  it  is  one  of  the  outgrowths 
of  our  present  financial  system.  It  was,  however,  abso- 
lutely necessary  to  issue  Clearing  House  loan  certificates 
to  enable  the  banks  to  purchase  United  States  bonds,  and 
thus  secure  additional  circulation. 

It  was  also  imperative,  in  the  panic  through  which  we 
have  just  passed,  to  issue  Clearing  House  loan  certifi- 
cates to  save  the  trust  company  situation.  The  trust 
companies,  having  no  Clearing  House  of  their  own,  were 
compelled  by  the  very  nature  of  things  to  ask  the  Clearing 
House  Association  to  assist  them  in  saving  the  situation, 


CLEARING   HOUSES   AND   THE   CURRENCY        113 

by  the  issue  of  Clearing  House  loan  certificates  to  enable 
them  to  liquidate  the  large  deposits  of  the  trust  companies 
of  which  they  were  taking  care.  The  methods  pursued 
by  the  committee  in  charge  of  the  trust  companies  was  to 
place  certain  collateral,  which  had  been  deposited  with  it, 
in  the  hands  of  the  trust  companies  which  had  subscribed 
to  the  fund  for  upholding  those  that  were  in  trouble. 
Such  of  the  companies  as  desired  to  do  so  made  their 
own  notes,  and  with  the  collateral  received  from  the 
committee,  borrowed  from  the  Clearing  House  banks 
with  which  they  did  business  the  amount  necessary  to 
meet  their  subscription  to  the  trust  company  "pool," 
at  the  same  time  giving  authority  to  the  banks  to  hypothe- 
cate their  note  and  collateral  with  the  New  York  Clearing 
House  Association,  and  receive  Clearing  House  loan 
certificates  for  the  same.  Had  it  not  been  that  the 
New  York  banks  were  able  to  take  out  Clearing  House 
loan  certificates  in  connection  with  this  phase  of  the 
matter,  a  very  grave  situation  would  certainly  have 
developed. 

It  might  be  well  to  remember  in  connection  with  this 
matter  that  the  banks  themselves  also  subscribed  a  very 
large  amount  of  money  to  assist  the  trust  company  "  pool," 
and  if  necessary,  in  order  not  to  interfere  with  the  handling 
of  their  regular  business  and  the  accommodation  of  their 
customers,  they  could  at  any  time  have  taken  out  more 
Clearing  House  loan  certificates. 

These  illustrations  will  show  what  an  important  part 
Clearing  House  loan  certificates  played  in  the  panic,  and 
the  absolute  necessity  for  their  creation  and  use. 

Clearing  House  loan  certificates  create  an  elasticity  in 
the  assets  of  banks.  In  times  of  panic  what  is  wanted  is 
assets  that  are  readily  convertible,  and  that  will  pay  de- 
positors as  well  as  permit  new  loans.  In  such  times  banks 
need  expansion  in  the  right  direction,  and  not  contraction. 


114         THE  CURRENCY  PROBLEM 

We  are  just  now  in  the  midst  of  a  discussion  of  the 
currency  problem  in  this  country,  and  one  of  the  strange 
things  about  the  matter  is  that  no  two  persons  can  exactly 
agree  on  the  subject.  Every  one  has  a  "special  plan" 
which  he  thinks  will  solve  the  problem.  I  am  one  of  a 
growing  number  of  bankers  who  believe  that  in  the 
adaptation  of  the  Clearing  House  loan  certificates  we 
have  the  solution  of  the  problem.  We  do  not  need 
more  fixed  currency  in  this  country,  but  we  need  flexi- 
bility to  meet  emergencies  such  as  we  have  been  passing 
through.  This  class  of  currency  should  be  retired  imme- 
diately, as  soon  as  its  usefulness  is  ended. 

In  times  of  panic  or  extremely  tight  money,  banks 
need  two  things :  something  that  will  enable  them  to 
convert  their  fixed  assets  into  liquid  assets  without  calling 
upon  borrowers  for  payment,  and  with  these  new  liquid 
assets  extend  further  credit  to  their  customers,  because 
in  such  times  the  demands  of  occasional  borrowers  upon 
the  banks  are  very  great.  This  is  really  the  purpose  of 
Clearing  House  loan  certificates,  as  they  allow  banks  to 
take  to  the  Clearing  House  their  fixed  assets  and  convert 
them  into  a  medium  of  exchange  between  themselves,  thus 
allowing  an  extension  of  further  credit,  which  credit  is 
utilized  by  their  depositors  through  the  Clearing  House. 

Add  to  this  function  one  more,  and  you  will  give  us 
all  that  is  needed  to  meet  any  emergency,  viz.,  a  currency 
to  take  the  place  of  that  which  is  hoarded.  The  hoard- 
ing of  money  always  accompanies  panics.  Panic  always 
produces  fright,  not  only  among  the  people  at  large,  but 
among  the  banks  themselves,  and  if  at  such  a  time  we 
could  have  a  safe  currency  which  would  fill  in  the  gap 
temporarily,  we  should  have  solved  the  problem  as  far  as 
panics  are  concerned. 

The  reserve  balances  of  the  country  banks  are,  as  a 
rule,  kept  in  the  large  money  centers,  and  upon  these 


CLEARING   HOUSES   AND   THE   CURRENCY        115 

centers  they  depend  for  their  excess  supply  of  currency. 
I  would,  therefore,  have  in  every  large  city  where  there 
is  a  subtreasury  the  Clearing  House  incorporated,  recog- 
nized by  law,  and  prepared  to  do  business  with  the 
United  States  government.  I  would  have  a  "United 
States  Emergency  Currency"  printed  in  large  quantities 
and  held  under  proper  safeguards  in  each  subtreasury. 
I  would  permit  the  Treasurer  of  the  United  States,  on 
proper  application,  to  receive  Clearing  House  loan  cer- 
tificates of  the  associated  banks  in  any  of  these  cities  as 
collateral  security,  and  advance  fifty  per  cent  of  the 
amount  of  such  certificates  deposited,  in  emergency  cir- 
culation, to  such  associations.  Such  circulation  should 
bear  six  per  cent  interest,  so  that  it  would  be  retired  at 
once  when  not  needed. 

This  circulation  would  cost  the  banks  twelve  per  cent, 
as  they  would  be  obliged  to  pay  six  per  cent  on  the  full 
face  value  of  the  Clearing  House  loan  certificates  taken 
out.  The  Clearing  House  could  make  rules  and  regu- 
lations for  apportioning  this  currency  among  its  members, 
and  I  would  have  the  "United  States  Emergency  Cur- 
rency" retired  by  the  deposit  of  lawful  money  with  the 
Treasurer  of  the  United  States,  just  as  the  national-bank 
note  circulation  is  now  retired. 

You  can  have  no  better  security  for  a  circulation  of 
this  character  than  Clearing  House  loan  certificates,  issued 
under  proper  safeguards  and  carrying,  as  they  do,  the 
joint  guaranty  against  loss  of  all  the  members  of  the 
Association.  Of  course  this  would  mean  a  change  in 
our  laws,  and  injecting  into  our  currency  another  kind  of 
money;  but  it  would  be  secured  beyond  peradventure. 
Its  retirement  would  be  provided  for  promptly,  and  when 
outstanding  in  the  hands  of  the  public  would  be  covered 
by  ample  collaterals  or  by  lawful  moneys  of  the  United 
States,  deposited  against  its  retirement. 


116         THE  CURRENCY  PROBLEM 

Such  currency  must  be  issued  by  the  United  States 
government  to  be  of  value,  as  the  membership  of  the 
clearing  houses  does  not  consist  entirely  of  national  banks, 
but  includes  state  banks  and  trust  companies ;  and  to  be 
of  assistance  to  the  general  situation,  in  times  of  panic, 
these  institutions  must  also  have  the  benefit  of  an  emer- 
gency circulation,  if  we  desire  the  stability  of  all  the  finan- 
cial institutions  of  this  country. 

I  would  include  in  the  act  of  incorporation  of  the 
clearing  houses  a  provision  that  Clearing  House  loan 
certificates  could  be  issued  at  such  other  times  as  in  the 
wisdom  of  the  members  of  the  Association  they  were 
needed,  and  thus  also  provide  a  flexible  currency  for  crop- 
moving  periods  or  other  money  stringencies.  An  emer- 
gency currency  of  any  character  whatever  must  be  quickly 
retired  and  canceled,  and  not  be  permitted  to  remain 
outstanding  as  a  further  inflation  of  our  already  much 
inflated  currency  ;  by  providing  for  its  redemption  by 
the  deposit  of  lawful  money,  you  throw  around  it  an- 
other safeguard. 

A  currency  of  this  character  would  also  meet  the  re- 
quirements of  the  mercantile  community.  If  a  merchant 
borrowed  from  his  bank,  say,  two  hundred  thousand 
dollars,  on  his  single-name  paper,  the  bank  could  give 
him  credit  on  its  books  for  that  amount  less  the  discount, 
upon  which  he  would  be  at  liberty  to  draw  through  the 
Clearing  House,  and  if  it  became  necessary  the  bank 
could  borrow  from  the  Clearing  House,  through  the  pooled 
credits  of  all  its  members,  Clearing  House  loan  certifi- 
cates to  the  amount  of  one  hundred  and  fifty  thousand 
dollars  (the  Clearing  House  requiring  a  margin  of  thirty- 
three  and  one-third  per  cent). 

The  merchant  would  then  inform  his  bank  that  he 
needs  currency  for  pay-rolls.  His  bank  could  provide 
for  his  needs  in  this  respect  by  requesting  the  Clearing 


CLEARING   HOUSES   AND   THE   CURRENCY        117 

House  to  deposit  the  one  hundred  and  fifty  thousand 
dollars  of  certificates  with  the  subtreasury,  and  receive 
seventy-five  thousand  dollars  in  emergency  circulation, 
which  in  turn  could  be  handed  to  the  depositor. 

In  times  of  very  active  money  and  panic  periods,  the 
bank  and  the  merchant  are  willing  to  pay  a  high  rate  of 
interest  for  this  privilege,  and  as  soon  as  the  stress  and 
storm  are  over  and  money  returns  to  its  accustomed  chan- 
nels, lawful  money  could  be  deposited  and  the  emergency 
currency  retired.  The  merchant's  collections  would  be 
made,  his  paper  retired,  and  it  would  have  served  the 
purpose  for  which  it  was  created.  This  same  method 
could  be  pursued  with  all  borrowers  who  needed  assist- 
ance, either  merchants  or  banks. 

This  would  seem  to  me  to  provide  a  safe  emergency 
circulation,  having  behind  it :  first,  the  credit  of  the 
institution  and  its  collateral  as  passed  upon  by  a  com- 
mittee of  bank  officers;  second,  the  fact  that  a  large 
margin  of  collateral  is  required  before  certificates  are 
issued;  third,  the  fact  that  the  government  is  asked  to 
advance  only  fifty  per  cent  on  Clearing  House  loan  certifi- 
cates ;  and  fourth,  the  certainty  of  its  prompt  retirement 
in  lawful  money  of  the  United  States. 


AMERICAN  AND   EUROPEAN   BANKING   METHODS 
AND   BANK   LEGISLATION   COMPARED 

BY 

PAUL  M.   WARBURG 


AMERICAN  AND  EUROPEAN  BANKING  METH- 
ODS AND  BANK  LEGISLATION  COMPARED 


A  comparison  of  European  and  American  banking 
methods  and  legislation  is  so  broad  a  subject  that  it  cannot 
be  fully  dealt  with  in  a  single  address.  It  will,  therefore, 
be  necessary  to  limit  ourselves  to  the  broad  outlines  of 
the  subject.  We  shall  endeavor  to  state  the  general 
basis  of  the  banking  business  in  Europe  and  to  compare 
it  with  our  own,  and  where  European  methods  differ 
from  each  other  in  detail,  we  shall  single  out  for  the 
purpose  of  comparison  that  system  which  is  generally 
acknowledged  to  be  the  most  efficient.  Furthermore, 
in  speaking  of  Europe,  we  shall  understand  the  term  to 
mean  primarily  the  three  prominent  financial  powers,  — 
England,  France,  and  Germany. 

Let  us  begin  by  establishing  the  line  on  which  modern 
banking  has  developed.  From  the  primitive  method 
of  bartering  goods  for  goods,  exchange  gradually  develops 
to  the  acceptance  of  an  acknowledged  standard  or  meas- 
ure, be  it  the  accepted  value  of  an  ox,  a  slave,  a  woman, 
a  measure  of  grain,  or  a  certain  weight  of  metal.  Those 
means  of  exchange  which  prove  the  most  durable  and, 
at  the  same  time,  are  the  handiest  because,  being  the  most 
precious,  they  absorb  the  least  space,  are  finally  evolved  as 
the  best  measures  of  value.  Thus  gold  and  silver  of  offici- 
ally  certified  weight  and  fineness  have  developed  as  the 
coin  and  currency  of  nations.  The  next  evolution  is  that, 
instead  of  accepting  and  carrying  about  clumsy  masses 
of  metal  coins,  the  owner  is  satisfied  to  accept  a  certificate 
of  ownership  of  metal  —  the  note.     Here  we  see  the  first 

121 


122  THE   CURRENCY   PROBLEM 

appearance  of  credit.  Credit  means,  literally,  faith; 
it  is  faith  in  the  bank  or  government  issuing  the  paper 
representing  the  bullion.  We  reach  a  state  of  modern 
banking,  however,  only  when  to  this  credit,  which  still 
means  payment  for  each  transaction  in  coin  or  coin 
certificate,  are  finally  added  other  bank  credits,  which 
become  part  and  parcel  of  the  banking  system.  This 
means  that  instead  of  paying  by  money  only,  the  vast 
majority  of  the  payments  are  effected  through  transfer  of 
credits;  it  means  payment  by  check.  I  need  not  dwell 
at  length  on  this  question  of  deposits  and  checks,  as  it 
has  been  fully  dealt  with  in  some  of  the  preceding  addresses. 
The  check,  however,  is  only  one  of  the  factors,  although  a 
very  important  one,  that  constitute  a  modern  banking 
system :  many  other  currency-saving  devices  which  pre- 
vent the  use  and  absorption  of  cash  have  to  be  added 
to  render  the  system  a  perfect  one.  We  must  add  a 
modern  system  of  bills  of  exchange  (by  which  we  mean 
two-  or  three-months  paper  drawn  on  banks  or  bankers 
or  indorsed  by  them)  well  regulated  by  clear  and  simple 
laws.  As  the  check  acts  as  a  means  of  transfer  of  cash 
credits  from  one  owner  to  another,  so  the  transfer  of  the 
acceptance  of  a  bank  is  the  transfer  of  credits  on  time ; 
it  is  like  the  transfer  of  banks'  interest-bearing  certifi- 
cates of  deposit  on  time.  We  shall  have  to  deal  fully  with 
this  important  question  a  little  later.  As  parts  of  a  mod- 
ern banking  system  we  must  further  add  well-organized 
stock  and  produce  exchanges  and  clear  and  simple  laws 
regulating  the  administration  of  corporations,  and  the 
issue,  the  transfer,  and  ownership  of  securities.  All 
these  refinements  of  our  business  intercourse,  if  I  may 
so  call  them,  have  the  object  and  effect  of  minimizing  the 
physical  transfers  of  property,  and  of  reducing  to  a  mini- 
mum the  dangers  of  such  transfers  by  establishing  well 
defined    and    generally   accepted    laws   and    regulations 


AMERICAN  AND   EUROPEAN   BANKING  123 

governing  such  transactions,  by  avoiding  unnecessary 
payments  (through  clearings),  by  liquidating  whatever 
balances  remain  to  be  settled  with  the  smallest  possible 
use  of  currency,  and  by  concentrating  into  large  centers 
all  offers  for  purchase  or  sale,  so  that  on  a  common 
meeting  ground  of  buyers  and  sellers  the  exchange  of 
properties  can  be  effected  with  the  least  expense,  the 
least  risk,  and  the  least  delay. 

To  transform  the  unsalable  individual  part-ownership 
or  individual  indebtedness  into  stocks  and  bonds  having 
a  wide  market,  and  to  standardize  merchandise,  is  an  im- 
portant step  in  the  development  of  this  time-,  risk-,  and 
currency-saving  device,  without  which  modern  banking 
is  inconceivable. 

We  have  to  add  one  more  factor  and  a  most  important 
one :  the  partial  replacement  of  money  by  instruments 
of  credit  must  needs  bring  about,  as  a  logical  consequence, 
the  necessity  of  reserves  of  money  to  meet  these  credit 
tokens,  to  redeem  which  cash  may  of  right  be  demanded. 
How  large  these  reserves  must  be  depends  largely  on  the 
strength  of  the  confidence  —  the  credit  —  upon  which  the 
general  structure  is  erected,  and  on  the  degree  of  per- 
fection with  which  these  reserves  may  be  made  available. 

An  ideal  banking  system  is  that  which  provides  for  the 
legitimate  needs  of  a  country  at  moderate  rates  with  the 
maximum  use  of  credit  and  the  minimum  use  of  cash, 
which  checks  illegitimate  or  dangerous  expansion  or  specu- 
lation, and  which  avoids  or  minimizes  as  far  as  possible 
all  violent  convulsions. 

We  need  not  emphasize  the  fact  that  the  European 
system  comes  very  near  accomplishing  this  ideal,  while 
our  system  has  proved  palpably  inefficient.  Recent 
events  have  again  brought  it  home  to  us  that  the  richest 
and  soundest  country  of  the  world  went  into  a  disgraceful 
state  of  temporary  insolvency,  while  European  nations, 


124         THE  CURRENCY  PROBLEM 

poor  by  nature  and  loaded  down  with  much  heavier 
burdens  than  we,  have  weathered  similar  storms  without 
any  such  panic  and  wholesale  destruction  of  property 
values.  Let  us  consider,  then,  wherein  our  system  differs 
from  theirs,  and  let  us  see  which  component  parts  are 
missing  in  our  machinery. 

II 

If  we  may  anticipate  our  conclusions,  we  may  say  that 
our  methods  are  completely  opposed  to  those  of  European 
countries. 

The  European  system  aims  at  centralization,  ours  at  de- 
centralization. Europe  believes  in  and  has  established 
a  system  of  central  banks,  issuing  an  elastic  currency 
which  follows  the  requirements  of  commerce  and  trade 
and  is  based,  more  or  less,  on  bills  of  exchange;  while 
the  United  States  has  so  far  refused  to  reestablish  a  cen- 
tral bank  and  persists  in  maintaining  a  system  of  inelastic 
currency  issued  by  6500  banks.  The  European  system 
is  built  on  modern  bills  of  exchange,  which  form  the  quick- 
est assets  ;  while  in  the  United  States,  the  rediscounting  of 
paper  by  banks  being  practically  unknown,  the  chief  quick 
assets  relied  upon  by  the  banks  are  call  loans  on  stock- 
exchange  collateral.  Europe  has  a  system  of  general 
banks  with  large  capitals  and  branch  banks  all  over 
the  country;  we  prohibit  a  similar  branch-bank  sys- 
tem, and  prefer  a  network  of  20,000  small  indepen- 
dent banks  and  trust  companies.  Europe  believes  in 
a  system  of  monthly  or  half-monthly  liquidations  for 
stock-exchange  transactions,  while  the  United  States 
maintains  daily  settlements.  Europe  has  succeeded  in 
working  out  for  each  country  clear,  generally  observed, 
and  uniform  laws,  regulating  all  commercial  and  financial 
questions  ;  while  in  the  United  States  not  only  do  the  laws 
differ  in  the  various  commonwealths,  but  the  underlying 


AMERICAN   AND   EUROPEAN   BANKING         '27 

principles  are  not  so  clearly  and  so  definitely  laid  down 
as  abroad,  and  every  now  and  then  the  basis  of  the  business 
structure  is  violently  shaken  by  some  new  interpretation 
or  legislation,  or  temporarily  upset  and  endangered  by 
sweeping  injunctions. 

In  order  fully  to  understand  the  European  system,  it 
will  be  necessary  to  explain  at  the  outset  the  importance 
of  the  bill  of  exchange  in  Europe  in  the  financial  inter- 
course amongst  individuals  as  well  as  amongst  nations. 
In  the  United  States  our  commercial  paper  is  the  old 
promissory  note,  it  is  a  bill  ;  in  Europe  commercial  paper 
is  a  bill  of  exchange.  I  think  that  I  cannot  more  forcibly 
express  the  difference  between  the  two.  In  the  United 
States  this  promissory  note  is  an  investment,  in  Europe 
it  is  a  means  of  exchange.  If,  in  the  United  States,  this 
promissory  note  has  entered  the  bank,  it  usually  remains 
there  until  it  falls  due ;  if  a  New  York  bank,  under  normal 
conditions,  would  try  to  rediscount  such  paper,  it  would 
create  suspicion  and  distrust.  This  means  that  every 
dollar  invested  by  a  bank  in  American  commercial  paper, 
that  is,  every  dollar  invested  to  satisfy  the  most  legitimate 
requirements  of  business,  leads,  without  fail,  to  a  locking 
up  of  cash  in  unsalable  assets.  We  have  been  shown 
bricks  of  the  time  of  Hammurabi,  the  Babylonian  mon- 
arch, evidencing  the  sale  of  a  crop  and  similar  transac- 
tions, and  I  am  inclined  to  believe  that  it  was  as  easy,  if 
indeed  not  easier,  to  transfer  the  ownership  of  these 
bricks  from  one  owner  to  another,  as  it  is  to-day  for  an 
American  bank  to  realize  upon  its  discounted  paper. 

Let  us  now  observe  the  absolutely  reverse  method  of 
the  European  countries.  In  Europe  there  are  scores  of 
banks  and  private  banking  firms  that  give  their  two  or 
three  months'  acceptances  for  the  commercial  require- 
ments of  trade,  or  that  make  it  their  specific  business 
to    indorse    commercial    bills.     A    commercial    borrower 


V  THE   CURRENCY   PROBLEM 

n  those  countries  who  does  not  get  a  cash  advance  will 
do  one  of  two  things :  he  will  either  sell  to  his  bank  or 
his  broker  his  own  three-months'  bill,  drawn  on  a  banking 
firm  willing  to  give  him  this  credit;  or  he  will  sell  the  bill 
drawn  by  him  on  his  customer  in  payment  for  goods 
sold  to  him,  which  bill  may  be  subsequently  passed  on 
with  the  indorsement  of  the  banker.  Through  the  addi- 
tion of  the  established  credit  of  the  acceptor,  or  by  the 
various  indorsements  on  the  bills,  the  quality  of  the  bill 
becomes  such  as  practically  to  eliminate  the  question  of 
credit  and  risk,  and  the  conditions  of  the  sale  will  depend 
only  on  the  rate  of  interest.  From  being  a  scarcely  salable 
promissory  note,  the  ownership  of  which  entails  a  more  or 
less  pronounced  commercial  risk,  the  paper  has  been 
transformed,  if  I  may  call  it  so,  into  a  standard  invest- 
ment, the  equivalent  of  which  in  cash  can  be  easily 
secured  at  any  time. 

This  prime  constituent  of  the  European  banking  machin- 
ery is  entirely  missing  with  us.  Its  existence  is,  however, 
most  important.  Without  such  paper,  the  government 
banks  of  Europe  could  not  accomplish  their  work;  and 
vice  versa,  the  role  which  this  paper  generally  plays 
in  Europe's  financial  household  is  dependent  on  the 
existence  of  central  banks.  The  two  cannot  be  sepa- 
rated. 

It  is  one  of  the  main  duties  and  privileges  of  the  gov- 
ernment banks  to  buy  legitimate  commercial  paper, 
with  bankers'  acceptances  or  bankers'  indorsements. 
As  the  government  banks  buy  this  paper,  the  circulation 
of  the  notes  which  they  issue  in  payment  increases,  and 
on  the  other  hand,  as  they  collect  this  paper  upon  maturity 
and  reduce  their  discounts,  their  outstanding  circulation 
decreases.  This  means  that  they  expand  or  contract 
according  to  the  requirements  of  trade.  However,  this 
is  not  a  merely  automatic  process.     For  as  those  intrusted 


AMERICAN   AND   EUROPEAN   BANKING  127 

with  the  management  of  the  government  bank  see  the 
necessity  of  exercising  a  restraining  influence,  they  raise 
the  rate  at  which  the  bank  discounts,  and  in  this  they  are 
generally  followed  by  the  other  banks  of  the  country. 
In  the  same  way,  if  the  government  bank  finds  it  advisable 
for  any  reason  to  discriminate  against  the  paper  or  the 
securities  of  certain  groups  or  individuals,  general  dis- 
crimination by  the  other  banks  will  usually  follow.  It 
might  be  well  to  add  that  the  European  government 
banks  are  not  limited  to  the  purchase  of  paper,  but  that 
they  also  have  the  privilege  of  making  advances  within 
certain  limits  upon  securities  up  to  a  fixed  percentage 
of  the  market  value,  according  to  stated  published  sched- 
ules. The  rate,  however,  at  which  such  advances  may 
be  made  as  well  as  the  government  bank's  discount  rate 
is  uniform  for  everybody  and  is,  as  a  rule,  so  much  higher 
than  that  of  the  general  banks,  and  the  restrictions  as 
to  the  character  of  the  securities  on  which  the  government 
bank  may  advance  are  so  much  more  rigid,  that  in  normal 
times  the  bulk  of  the  business  is  done  by  the  general 
banks.  Only  when  the  demand  for  money  increases,  does 
the  rate  of  the  general  banks  begin  to  approach  that  of 
the  government  bank;  but  in  that  case  the  government 
bank  will,  as  a  rule,  raise  its  rate,  so  as  again  to  increase 
the  margin  over  that  of  the  general  banks.  The  govern- 
ment banks  consider  themselves,  more  or  less,  as  constitut- 
ing the  national  reserve,  ready  to  take  an  active  part  in  the 
nation's  business  only  in  times  of  emergency.  A  distinc- 
tion is,  however,  carefully  to  be  drawn  between  the  ab- 
normal crisis  and  what  we  may  call  the  normal  emergency 
which  arises  regularly  in  consequence  of  certain  economic 
developments,  like  crop  movements  or  particular  require- 
ments for  special  industries  at  fixed  periods,  and  which,  as 
experience  has  shown,  subside  after  a  time  as  regularly 
as  they  occur.     When  these  normal  emergencies   arise, 


128         THE  CURRENCY  PROBLEM 

the  banks  do  not  unduly  raise  their  rate,  but,  for  the  time 
being,  meet  all  the  requirements  at  a  given  rate,  and  allow 
their  circulation  to  increase,  while  the  reserves  go  down. 
When  the  government  banks  anticipate,  however,  that 
more  than  a  normal  emergency  will  have  to  be  dealt 
with,  they  continue  to  raise  the  rates  in  order  to  protect 
their  reserves  and  to  force  liquidation,  and  in  order  to 
deter  all  branches  of  industry  and  trade  from  entering  upon 
far-reaching  new  engagements. 

The  notes  which  the  government  banks  are  allowed  to 
issue  are  limited  by  the  amount  of  gold  and  bullion 
which  must  be  held  to  cover  them  in  full,  or,  as  in  Germany, 
up  to  at  least  thirty-three  per  cent.  It  would,  however,  lead 
too  far  astray  to  go  into  the  details  of  these  special  regula- 
tions which  govern  the  issue  of  notes  in  the  different  coun- 
tries. It  will  suffice  here  to  outline  the  general  rule. 
Each  government  bank  has  a  very  decided  interest  in 
keeping  its  gold  holdings  as  large  as  possible,  and  in  pre- 
venting the  gold  from  leaving  the  country.  If  an  aug- 
mented demand  for  money  and  credit  accommodation 
increases  the  amount  of  notes  outstanding,  the  govern- 
ment bank,  by  raising  its  rate,  purposes  not  only  to  en- 
courage a  general  contraction  of  business,  and  to  force  the 
general  banks  of  the  country  to  contract,  but  also  to 
attract  foreign  money  into  the  country.  If  England 
has  a  private  discount  rate  of,  say,  six  per  cent,  that  is, 
if  first-class  commercial  paper  accepted  or  indorsed  by 
banks  can  be  bought  on  an  interest  basis  of  six  per  cent, 
and  if,  at  the  same  time,  there  is  in  France  a  discount  rate 
of  four  per  cent,  it  stands  to  reason  that  the  big  French 
banks  and  the  French  public  will  invest  in  English  bills, 
and  that  French  money  will  go  to  England.  The  same 
holds  good,  of  course,  as  to  German,  Austrian,  Russian, 
or  Scandinavian  bills.  It  is,  for  instance,  well  known 
that  at  present,  while  rates  in  Germany  are  high  and  in 


AMERICAN   AND   EUROPEAN   BANKING  129 

France  comparatively  low,  hundreds  of  millions  of  Ger- 
man paper  are  held  by  the  French  banks. 

The  French  banks  would  not  buy  the  individual  note 
of  an  English,  German,  Russian,  or  Scandinavian  mer- 
chant whom  they  do  not  know;  but  they  do  know,  and 
must  know,  the  value  of  the  acceptance  or  the  indorse- 
ment of  the  foreign  banks,  which  offer  and  indorse  or 
accept  this  paper.  They  would  not  buy  this  paper,  unless 
they  knew  that  it  can  be  rediscounted  at  any  time  through 
the  existence  of  a  central  bank  in  the  home  country. 
None  the  less,  however,  the  bulk  of  the  business  transacted 
by  a  central  bank  is  only  a  fraction  of  the  total  business  of 
the  country,  and  is,  in  normal  times,  limited  almost  en- 
tirely to  the  purchase  and  collection  of  short  bills.  The 
mere  existence  of  the  central  bank,  however,  enables  the 
general  banks  to  discount  freely ;  and  as  everybody  thus 
discounts  freely,  there  is  the  widest  possible  market  for 
discounts  even  without  any  active  purchases  by  the  central 
bank. 

While  we  cannot  attempt  to  give  any  full  description 
of  the  working  of  central  banks,  it  may  be  well  to  add  that 
some,  like  the  Banque  de  France  and  the  Reichsbank, 
have  hundreds  of  branch  offices,  spread  all  over  the  coun- 
try, which,  in  Germany  in  particular,  have  developed 
an  admirable  system  of  collection  and  of  transferring 
moneys  from  one  place  to  another.  It  may  also  be  interest- 
ing to  note  that,  contrary  to  a  wide-spread  idea,  the  central 
banks  of  Europe  are,  as  a  rule,  not  owned  by  the  govern- 
ments. As  a  matter  of  fact,  neither  the  English,  French, 
nor  German  government  owns  any  stock  in  the  central 
bank  of  its  country.  The  Bank  of  England  is  run  en- 
tirely as  a  private  corporation,  the  stockholders  electing 
the  board  of  directors,  who  rotate  in  holding  the  presi- 
dency. In  France  the  government  appoints  the  governor 
and  some  of  the  directors   {regents).      In   Germany  the 


130         THE  CURRENCY  PROBLEM 

government  appoints  the  President  and  a  supervisory 
board  of  five  members,  while  the  stockholders  elect  the 
board  of  directors.  The  German  government  receives 
three-quarters  of  the  profits  after  the  stockholders  have 
received  a  dividend  of  three  and  one  half  per  cent.  Thus 
the  central  banks  are  independent  of  direct  government 
interference,  or  there  is  a  joint  control  by  government  and 
stockholders.  But  the  government  is  the  largest  depositor 
of  the  bank,  and  is  thus  obviously,  both  for  its  own  credit 
and  for  the  welfare  of  the  nation,  vitally  interested  in 
maintaining  its  credit  at  the  highest  possible  notch. 

The  consequence  of  a  broad  bill  market  is,  that,  whereas 
our  banks  keep  against  their  deposits  primarily  call  loans 
on  stock-exchange  collateral,  a  European  bank  or  banker 
will  keep  against  his  demand  obligations  a  large  amount  of 
banking  paper,  which  he  can  sell  at  any  time  at  the  dis- 
count rate,  without  causing  any  such  commotion  as  is 
created  with  us  when  call  money  is  rapidly  withdrawn 
from  the  stock  exchange. 

Call-money  rates  and  their  daily  fluctuations  do  not 
directly  affect  European  stock  exchanges.  Europe  has 
developed  a  system  of  monthly  or  half-monthly  settle- 
ments on  its  stock  exchanges,  which  means  that  from 
one  settlement  to  the  other,  the  amount  of  cash  required 
by  the  stock  exchange  remains  stationary.  If,  at  the 
settlement,  it  develops  that  commitments  on  the  stock 
exchange  have  increased,  and  that  a  larger  amount  of 
money  is  needed  for  stock-exchange  loans  under  normal 
circumstances,  so  much  more  money  will  be  withdrawn 
from  the  bill  market  and  go  into  the  stock  exchange.  If 
less  money  is  wanted  by  the  stock  exchange,  so  much 
more  will  go  into  the  bill  market.  We  cannot  dilate 
fully  on  the  interesting  question  of  the  comparative  merits 
of  daily  versus  monthly  stock-exchange  settlements.  It 
may,  however,  be  said  that  if  it  is  a  saving  not  to  settle 


AMERICAN   AND   EUROPEAN   BANKING  131 

each  transaction  by  individually  delivering  and  paying 
for  each  purchase  and  sale,  but  to  pay  and  deliver  only 
the  balance  of  the  whole  day's  transactions  by  one  clear- 
ing (without  which  it  would  be  impossible  to  deal  in  a 
million  shares  a  day),  then  the  saving  would  be  still  further 
increased  if  the  clearings  covered  not  only  one  day,  but 
a  whole  week  or  a  whole  month.  It  might,  however, 
be  asked :  Why  not  then  clear  only  once  a  year  ?  The 
answer  is  that,  until  the  transaction  is  actually  paid  for, 
there  is  a  risk  that  with  wide  fluctuations  one  of  the  con- 
tracting parties  may  not  be  able  to  pay  the  difference 
between  the  price  on  the  day  on  which  the  business  was 
concluded  and  on  the  day  when  it  would  be  finally  settled. 
That  is  the  reason  why  settlements  in  England  do  not 
exceed  two  weeks,  and  why  in  New  York  they  should 
probably  not  exceed  one  week,  for  which  period  some 
method  of  clearing  the  differences  daily  or  of  securing 
them  by  collateral  might  easily  be  devised. 

The  present  American  system  of  daily  settlements, 
however,  combined  with  the  lack  of  a  central  bank  and  of 
modern  paper,  brings  about  the  shocking  conditions  from 
which  we  are  suffering.  It  is  a  fact  that  in  Europe,  where 
settlements  exist,  such  wild  fluctuations  as  prevail  with 
us  are  unknown,  except  in  our  own  securities. 

Our  much  maligned  stock  exchange  is  the  scapegoat 
of  the  nation ;  if  trade  contracts,  the  surplus  money  from 
the  Atlantic  to  the  Pacific  is  thrown  on  the  stock  exchange, 
creating  easy  money  and  encouraging  speculation  in 
securities  just  at  a  time  when  speculation  ought  to  be 
slow.  If  industry  and  trade  thrive,  and  are  in  need  of 
money,  call  loans  are  withdrawn  from  the  stock  exchange, 
and,  the  more  money  is  required  by  commerce  and  in- 
dustry, the  more  the  stock  exchange  will  be  depleted. 
The  usual  consequence  is  our  annual  money  panic,  and 
a  resulting  violent  collapse  of  prices  of  securities. 


132         THE  CURRENCY  PROBLEM 

This  obnoxious  system  of  cash  dealings  is  forced  upon 
us  as  the  result  of  our  unreasonable  usury  law,  which, 
although  making  it  unlawful  to  take  more  than  six  per 
cent  on  time  loans,  is  in  reality  the  direct  cause  of  an 
almost  confiscatory  rate  being  charged  from  day  to  day 
for  weeks  at  a  time.  We  shall  dwell  upon  this  law  later. 
The  fact  remains  that  with  a  legal  limit  of  six  per  cent 
for  time  money,  and  with  the  desire  of  the  banks  not  to 
charge  merchants  a  higher  rate,  and  with  the  lack  of  any 
modern  paper  which  we  could  offer  to  other  nations,  there 
remain  practically  only  two  means  of  relieving  the  strin- 
gency and  of  attracting  foreign  money.  These  are  the 
utilization  of  foreign  credit,  through  long  bills  drawn  by 
our  banks  or  bankers  on  Europe  (and  these  could  hardly 
be  used  during  the  last  crisis  in  consequence  of  England's 
drastic  measures)  and  incredibly  high  rates  for  call 
money,  that  bring  about  wholesale  realizations,  and  at- 
tract foreign  buyers  at  our  bankruptcy  prices. 

Banks  have  been  blamed  for  the  high  rates  and  for  hav- 
ing had  so  much  money  on  the  stock  exchange.  They 
are  absolutely  helpless  with  regard  to  both.  How  could 
a  bank  withstand  a  run,  if  it  had  all  its  money  in  unsalable 
commercial  paper,  and  how  is  a  bank  to  meet  the  demands 
made  upon  it  otherwise  than  by  drawing  upon  its  quick 
assets,  viz.  its  call  loans.  It  is  our  system  that  is  wrong 
from  top  to  bottom ;  it  is  this  and  not  the  individual  that 
is  to  be  blamed  in  this  respect. 

The  aggregate  amount  invested  in  trade  and  commerce 
must  vary.  Its  grand  total  should  be  many  times  the 
amount  invested  in  stock-exchange  loans,  which  represent 
the  securities  carried  for  speculative  investors.  Our 
way  of  doing  business  may  be  illustrated  by  two  adjoining 
reservoirs,  a  small  one  and  a  very  large  one.  The  small 
one  represents  the  stock  exchange  and  contains  the  call 
loans ;  the  large  one  represents  the  general  business  of 


AMERICAN   AND   EUROPEAN   BANKING         133 

the  country,  as  expressed  by  commerce  and  industry. 
In  Europe  they  regulate  the  small  reservoir  by  pumping 
water  into  it  from  the  large  one,  or  by  withdrawing  water 
from  the  small  reservoir  into  the  large  one.  In  this 
way,  the  outflow  and  inflow  in  the  large  reservoir  are 
scarcely  perceptible,  and  there  is  no  difficulty  in  regulating 
the  small  one.  With  us,  we  do  the  reverse.  If  there  is 
a  shortage  of  water  in  the  large  reservoir,  we  begin  to 
draw  on  the  small  one  and,  in  order  to  increase  the  water 
in  the  large  reservoir  by  an  inch,  we  empty  the  small  one 
altogether  or,  in  order  to  decrease  the  amount  of  water  in 
the  large  reservoir  by  an  inch,  we  fill  the  small  one  to  the 
overflowing  point.  Moreover,  Europe  can  tap  a  third 
reservoir,  the  additional  currency  issued  by  a  central 
bank,  with  which  to  regulate  the  large  reservoir  if  it  fluc- 
tuates more  than  a  few  inches,  while  with  us  no  such  final 
reserve  exists.  As  a  consequence,  fluctuations  of  several 
feet  appear  to  be  inevitable  and  regular  occurrences  with 
us.  It  may  be  added  that  not  for  many  years  has  the  Eu- 
ropean reservoir  shown  such  variations  as  this  year,  and 
we  must  sadly  admit  that  Europe's  abnormal  rates  were 
due  largely  to  our  own  unbalanced  conditions.  Unable  to 
regulate  our  own  household  and  to  use  our  own  gold,  we 
have  accustomed  ourselves  to  use  and  to  abuse  Europe, 
which  suffers  intensely  from  our  lack  of  a  proper  system. 

Ill 

Let  us  now  add  a  few  words  about  European  and 
American    banks    in    general. 

We  have  in  the  United  States,  national  banks,  state 
banks,  and  trust  companies,  practically  without  any 
proper  line  of  demarcation ;  they  are  all,  more  or  less, 
doing  a  similar  business,  except  that  the  national  banks 
have  the  privilege  and  duty  of  providing  currency  against 
government  bonds.     In  Europe  we  find  the  privilege  of 


134         THE  CURRENCY  PROBLEM 

note  issue  restricted  to  the  government  banks,  which  are 
hemmed  in  by  such  regulations  as  to  keep  them  out  of 
speculative  business  or  general  commercial  transactions. 
Whenever  a  note-issuing  bank  desires  to  enter  upon 
general  business,  it  has  to  abandon  the  privilege  of  issuing 
notes. 

Outside  of  the  note-issuing  banks  the  only  European 
banks  that  are  regulated  by  law  as  to  their  investments 
and  their  way  of  doing  business  are  the  savings  banks. 
For  all  other  banks  there  is  no  government  super- 
vision, no  laws  as  to  their  reserves  against  deposits,  and 
no  restrictions  as  to  indorsing  or  establishing  branch 
banks,  etc.  On  the  contrary,  accepting,  discounting, 
and  indorsing  paper  form  the  essence  of  Europe's  bank- 
ing, which  is  built  up  on  a  system  of  old,  established, 
very  important,  general  banks  with  large  capital  and  with 
a  network  of  branch  offices  and  agencies  all  over  the  coun- 
try, and  in  the  centers  with  many  branch  offices  in  a 
single  town.  On  the  whole,  this  system  of  making  large 
responsible  banks  and  their  branches  the  custodians  of 
the  people's  money  is  preferable  to  our  system  of  allowing 
a  few,  often  irresponsible,  men  to  get  together,  hire  some 
ground-floor  corner,  fit  it  up  in  marble  and  bronze,  and 
call  it  a  bank,  with  a  capital  of  $100,000,  and  often  less, 
and  a  corresponding  surplus  paid  in,  not  earned.  Small 
banks  constitute  a  danger,  particularly  so,  if  they  ac- 
cumulate deposits  which  are  out  of  proportion  to  their 
own  resources.  There  is  an  old  French  and  Italian 
banking  rule  that  deposits  ought  not  to  exceed  four  or 
five  times  the  amount  of  capital  and  surplus.  This  rule 
is  certainly  a  wise  one  for  a  country  with  such  an  imper- 
fect banking  organization  as  the  United  States. 

While  Germany  and  France  may  claim  the  best  govern- 
ment bank  organization,  there  has  been  too  much  con- 
centration in  the  business  of  the  general  banks  of  these 


AMERICAN   AND   EUROPEAN   BANKING  135 

two  countries.  The  German  and  French  banks  have 
accomplished  a  wonderful  piece  of  work,  but  their  system 
of  "taking  it  all,"  being  banks  of  deposits,  discounters, 
acceptors,  indorsers,  brokers,  and  underwriters  at  the 
same  time,  is  not  free  from  danger.  Not  that  there  is 
risk  of  their  getting  involved,  but  there  is  too  much  elim- 
ination of  independent  firms,  which  constitute  a  valuable 
backbone,  especially  in  times  of  need.  In  Germany, 
where  this  process  has  been  most  marked,  there  is  a  strong 
movement  on  foot  to  undo  the  harm  that  has  been  done. 

The  English  system  has,  in  this  respect,  so  far  proved 
the  best,  for  the  reason  that,  while  they  have  large  deposit 
banks  with  branch  offices  all  over  the  country,  they  have 
kept  these  deposit-and-check  banks  comparatively  free 
from  commission,  investment,  underwiting,  and  kindred 
operations.  In  England  the  investment  and  the  commis- 
sion business  remains  mainly  with  the  broker,  while  the 
contracting  of  large  loans  and  the  formation  of  syndicates 
is  generally  left  to  private  firms,  or  if  it  is  a  question  of 
South-American,  Oriental,  or  colonial  loans,  to  the  banks 
which  confine  themselves  to  business  with  these  countries. 
Again,  there  are  foreign  exchange  houses  and  firms 
conducting  exclusively  an  accepting  and  indorsing  busi- 
ness ;  and  finally,  there  are  the  big  discount  companies. 
One  might  say  that  every  branch  of  these  various  enter- 
prises is  taken  care  of  in  an  able  and  efficient  manner  in 
England :  business  is  done  at  fair  rates  and,  at  the  same 
time,  substantial  profits  are  earned. 

In  Europe  the  general  banks  are  not  required  to  hold 
gold  reserves.  Gold  reserves  are  kept  exclusively  by 
the  note-issuing  central  banks,  which  have  outstanding 
on  demand  obligations  payable  in  gold. 

We  ought  carefully  to  draw  the  line  between  a  working 
reserve  and  a  gold  reserve.  A  general  bank  has  no  need 
of  a  gold  reserve.     But  every  general  bank  or  financial 


136         THE  CURRENCY  PROBLEM 

institution  ought  to  have  a  large  working  reserve  against  its 
demand  obligations.  Such  working  reserve,  however,  need 
not  consist  of  legal  tender  notes,  but  of  such  assets  as 
can  be  quickly  turned  into  cash  credits ;  be  it  call  loans, 
bank  paper,  British  Consols,  or  whatever  can  readily 
be  made  available  in  times  of  stress.  In  addition,  the 
European  banks  generally  have  very  large  on-demand  de- 
posits especially  with  the  central  bank  of  the  country, 
and,  of  course,  a  substantial  amount  of  actual  cash  as  it  is 
required  for  the  daily  needs  of  the  business. 

But  why  should  state  banks  or  trust  companies  or 
national  banks,  if  they  happen  not  to  issue  notes,  carry 
gold  reserves  ?  For  their  own  protection  they  need  strong 
working  reserves,  but,  if  it  were  not  for  our  lack  of  a  cen- 
tral bank  and  for  the  shortcomings  of  our  Treasury  system, 
why  must  they  lock  up  legal  tender  notes  to  such  an  extent  ? 

In  Europe  the  gold  reserve  and  the  emergency  reserve 
of  the  country  are  kept  and  managed  by  the  central  bank. 
We  have  already  shown  how  the  government  bank  acts 
in  protecting  the  country  and  in  providing  for  its  needs. 
Let  us  clearly  understand,  that  without  the  bank  rate,  that 
is,  without  the  ability  to  regulate  the  rate  of  interest  in 
times  when  the  government  bank's  cooperation  is  needed, 
its  efficacy  would  be  nil.  A  system  of  modern  banking 
paper  is  absolutely  necessary  to  establish  this  power  of 
the  bank,  and  furthermore,  a  credit  so  firmly  established, 
that  the  higher  rate  of  interest  will  act  as  an  inducement 
to  invest  and  not  as  a  breeder  of  distrust  and  an  incentive 
to  realize.  A  further  requirement  is  a  system  of  large  and 
conservative  banks  that  will  cooperate,  and  that,  as  a  mat- 
ter of  fact,  cannot  afford  to  abstain  from  falling  in  line 
with  the  general  tendency  initiated  by  the  central  bank. 

With  such  a  system,  a  panic  like  the  one  from  which 
we  are  just  emerging  should  be  impossible.  For  no  matter 
whence  money  is  withdrawn,  it  would  turn  up  in  another 


AMERICAN   AND   EUROPEAN   BANKING  137 

bank.  It  is  inconceivable  that  conditions  would  now- 
adays arise  in  either  England,  Germany,  or  France  where 
people  would  lose  entire  confidence  in  all  banks,  govern- 
ment banks  and  savings  banks,  so  that  actual  hoarding 
and  locking  away  of  money  would  occur.  Our  worst 
hoarders,  the  banks  and  trust  companies,  would,  under 
a  European  system,  have  no  reason  to  lock  up  actual 
money,  since  they  would  be  fully  protected  by  accumu- 
lating a  balance  with  the  central  bank.  The  unheard-of 
fact  that  during  a  scarcity  of  currency  the  banks,  instead 
of  disbursing  their  cash,  begin  to  accumulate  and  actually 
to  hoard  currency,  would  be  an  impossibility. 

There  are  two  different  kinds  of  panics  or  crises  with 
which  a  nation  may  have  to  deal.  One  is  a  domestic 
drain,  created  by  strong  domestic  demands,  degenerating 
into  a  panic  by  some  catastrophe  engendering  the  fear  that 
the  supply  of  money  will  reach  an  end.  Such  panics 
must  be  met  by  paying  out  freely  and  boldly.  Bagehot 
says :  "  A  panic,  in  a  word,  is  a  species  of  neuralgia ;  and 
according  to  the  rules  of  science,  you  must  not  starve  it. 
The  holders  of  the  cash  reserve  must  be  ready,  not  only  to 
keep  it  for  their  own  liabilities,  but  to  advance  it  most 
freely  for  the  liabilities  of  others.  In  wild  periods  of 
alarm  one  failure  makes  many,  and  the  best  way  to  pre- 
vent the  derivative  failures  is  to  arrest  the  primary  failure 
which  causes  them."  And  further  on  he  says  :  "It  is  not 
unreasonable  that  our  ultimate  treasure  in  particular 
cases  should  be  lent ;  on  the  contrary,  we  keep  that  treas- 
ure for  the  very  reason  that  in  particular  cases  it  should 
be  lent." 

Another  kind  of  panic  may  arise  through  a  drain  from 
without.  Such  drain  must  be  met  in  modern  countries 
by  increasing  the  rate  of  interest  until  the  tide  has  turned, 
until  the  creditor  finds  it  more  profitable  to  leave  the 
money  where  it  brings  attractive  interest  than  to  with- 


138         THE  CURRENCY  PROBLEM 

draw  it.  Both  kinds  of  panics  have  been  successfully 
met,  or  have  been  entirely  averted,  in  Europe  by  central 
banks  and  by  a  firmly  established  credit.  Germany, 
for  instance,  without  such  a  system,  would  now  be  in  the 
midst  of  a  panic ;  but  she  has  safely  avoided  it,  in  spite  of 
her  being,  by  nature,  a  poor  country,  while  we,  Nature's 
spoilt  children,  need  only  be  wise  to  be  rich  and  safe. 

As  it  is,  we  neither  can  protect  ourselves  by  a  discount 
rate,  there  being  no  discount  system,  no  central  bank,  and 
no  legal  rate  beyond  six  per  cent ;  nor  can  we  meet  an  in- 
ternal panic  because,  irrespective  of  other  shortcomings 
of  our  system,  it  forces  each  bank  to  look  out  for  itself 
and  to  try  to  draw  away  the  cash  from  the  others,  in  order 
to  increase  the  amount  in  its  own  vaults,  thus  aggravating 
the  panic.  While  the  only  way  to  meet  a  panic  should 
be  to  pay  freely,  any  bold  action  is  paralyzed  by  the 
frightful  thought  that  there  is  no  way  of  creating  ad- 
ditional currency,  and  by  the  knowledge  that,  if  the 
drain  continues,  there  are  no  means  of  preventing  whole- 
sale individual  failures  unless  general  suspension  of  cash 
payments  is  adopted.  While  one  thousand  millions 
of  dollars  were  lying  idle  in  our  banks  and  trust  com- 
panies as  so-called  reserves,  that  is,  as  the  final  resort 
in  case  of  need,  this  money,  by  virtue  of  the  law,  could 
scarcely  be  touched !  What,  then,  is  the  use  of  such  re- 
serves, if  they  are  not  available  in  such  times,  and  if, 
even  in  contravention  of  the  law,  they  could  not  be  used 
by  one  bank  without  fear  of  being  ruined,  unless  all  banks 
agreed  to  use  them  freely  ?  And  as  it  is  impossible,  even 
without  such  a  law,  to  make  all  banks  act  in  the  same 
bold  way,  it  follows  that  reserves  should  be  concen- 
trated, as  they  are  in  Europe,  and  that  while  the  banks 
may  be  asked  to  cooperate,  they  must  be  governed  in 
this  respect  by  one  central  organ. 

The  question  of  treasury  and  government-bond  secured 


AMERICAN   AND   EUROPEAN   BANKING  139 

bank-notes  has  been  so  fully  and  so  ably  dealt  with  by 
Mr.  Hepburn  in  a  preceding  address,  that  I  can  limit 
myself  to  the  hearty  indorsement  of  what  he  said  in  this 
respect. 

The  net  result  of  our  system  is  that  immense  amounts 
of  gold  and  currency  are  wastefully  locked  up,  and  that, 
in  spite  of  our  immense  gold  treasure,  which  is  four  times 
as  large  as  that  of  England,  and  notwithstanding  our 
enormous  per  capita  circulation  of  thirty-five  dollars,  we 
suffer  almost  annually  from  acute  scarcity  of  money. 

If  we  only  had  the  means  energetically  to  contract  our 
currency,  and  to  use  our  gold  in  a  scientific  and  a  practical 
way,  we  should  have  gold  and  currency  enough  to  meet  any 
panic.  As  it  is,  the  amount  of  notes  outstanding  is  about 
stationary  in  times  of  activity  or  stagnation  alike,  while 
as  a  consequence  the  rates  for  money  vary  between  zero 
and  two  hundred  per  cent.  In  Europe  it  is  the  reverse ; 
rates  are  fairly  stationary  and  the  amount  of  notes  out- 
standing contracts  and  expands.  With  a  cash  balance 
of  $260,000,000  during  the  recent  crisis,  our  government 
had  to  incur  new  indebtedness  to  enable  and  to  induce  the 
banks  to  issue  additional  currency.  Within  three  months 
the  circulation  increased  through  this  artificial  process  by 
eighty  million  dollars,  but  the  government  had  to  lose 
about  $1,000,000  of  the  people's  money  to  reach  this 
result.  On  the  other  hand,  the  German  Reichsbank  issued 
in  one  week,  at  the  end  of  last  December,  M.  320,000,000 
and  the  government  received  a  five  per  cent  tax  on  this 
issue,  which  is  borne  by  those  who  received  the  money. 
These  notes  returned  to  the  Reichsbank  within  less  than 
three  weeks. 

Our  present  system  of  maintaining  and  selling  gov- 
ernment bonds  on  a  basis  so  high  that  only  national 
banks  can  buy  them  results  in  constant  inflation  of  our 
currency  by  about  seventy-five  per  cent  of  the  amount 


140         THE  CURRENCY  PROBLEM 

of  new  government  securities  issued  from  time  to  time. 
Inflation  with  practically  no  contraction  !  It  would  be 
cheaper  and  more  straightforward  if  the  government, 
instead  of  issuing  interest-bearing  government  bonds, 
would  issue  new  greenbacks.  It  amounts  to  the  same 
thing,  and  the  government  would  in  addition  not  lose  the 
interest. 

Furthermore,  our  one-man-power  system  of  the  Treasury 
is  contrary  to  European  ideas ;  it  is  harmful  to  the  country 
and  unfair  toward  the  incumbent  of  the  office.  While 
our  generation  has  been  particularly  fortunate  in  seeing 
this  office  occupied  by  honest  and  able  men  only,  the 
danger  remains,  nevertheless,  that  this  vast  power  may 
one  day  be  vested  in  less  desirable  men.  Besides,  the 
laws  governing  the  functions  and  powers  of  the  Secretary 
of  the  Treasury  are  old-fashioned,  in  parts  too  loose  and 
in  parts  too  extreme,  and  not  clearly  defined,  so  that  even 
under  the  same  President  we  find  a  radical  change  from 
one  method  to  another,  according  to  the  individual  inter- 
pretation by  the  incumbent  of  the  office. 

This  lack  of  continuity  is  deleterious.  Europe  does 
not  give  such  vast  and  arbitrary  powers  to  one  single 
political  official,  holding  office  only  for  a  comparatively 
short  time,  and  often  without  proper  business  training. 
On  the  contrary,  the  powers,  clearly  defined  and  properly 
restricted,  are  vested  in  a  permanent  non-partisan  body 
of  business  men  of  the  highest  standard,  thus  constituting 
a  system  which  insures  clear  legal  conditions,  safety,  and 
continuity. 

IV 

A  similar  difference  exists  between  the  United  States 
and  Europe  as  to  general  legislation  governing  banking 
transactions  and  corporations.  In  dealing  with  these 
questions  it  is  not  my  intention  to  accuse  anybody  nor  to 


AMERICAN   AND   EUROPEAN   BANKING  141 

excuse  anybody;  the  only  object  of  this  investigation  is  to 
explain  certain  fundamental  shortcomings  of  our  system. 

Modern  banking  is  built  upon  gold  —  and  confidence. 
The  question  of  how  to  estimate  working  reserves,  busi- 
ness risks  and  profits,  as  well  as  the  general  valuation  of 
securities,  all  these  are  indissolubly  interwoven  with  the 
other  question  of  how  firmly  established  is  the  confidence 
on  which  the  whole  structure  rests  and  how  far  this  confi- 
dence is  liable  to  be  shaken  in  normal  and  in  troublous 
times. 

The  basis  of  confidence  is  an  immutable  belief  in  the 
continuity  of  political  and  social  conditions,  which  are 
held  to  be  safe  and  sacred.  There  must  be  faith  in  the 
continuity  of  the  form  of  government,  in  the  continuity 
of  the  legal  status,  and  in  the  fair  observance  of  law  by 
government  and  governed  alike.  There  cannot,  however, 
be  confidence  in  the  continuity  of  the  laws  until  they  rest 
on  a  broad,  equitable  basis,  and  are  fairly  uniform  over 
the  entire  country.  There  is  nothing  so  harmful  and  so 
dangerous  as  the  existence  of  two  laws,  the  one  a  written 
law,  unenforced  and  often  impossible  of  enforcement, 
the  other  a  customary  law,  which  stands  unchallenged 
for  generations  and  which  the  written  law  cannot  over- 
ride, often  because  the  latter,  enacted  in  haste  or  hate,  is 
incompatible  with  reasonable  business  usages  and  necessity. 

Just  and  uniform  laws,  universally  observed  and  equably 
enforced,  imply  wholesome  government  regulation.  Loose 
or  extreme  laws  that  cannot  be  observed  and  that, 
therefore,  are  not  generally  enforced,  but  that  may  be 
suddenly  and  spasmodically  enforced  according  to  the 
whim  of  the  people  or  of  the  party  in  power  (yesterday 
a  dead  letter  and  to-morrow  a  firebrand),  imply  anarchy 
or  autocracy.  In  financial  matters  Europe  has  advanced 
far  in  attaining  the  former  condition ;  we  have  made  little 
progress  in  emerging  from  the  latter  condition. 


142         THE  CURRENCY  PROBLEM 

To  cite  only  a  few  instances  : 

If  the  full  taxes  on  capital,  at  present  about  1.68  per 
cent,  were  exacted  and  paid,  no  capitalist  could  remain 
in  New  York. 

If  banks  did  not  overcertify,  our  financial  centers 
would  have  to  stop  business. 

If  it  had  not  been  possible  to  pay  rates  far  exceeding 
six  per  cent  for  time  loans,  it  would  not  have  been  pos- 
sible a  few  weeks  ago  to  draw  so  much  gold  from  Europe, 
where  money  rates  were  above  six  per  cent,  and  the  catas- 
trophe would  have  been  still  worse  than  it  was. 

But,  we  venture  to  ask,  why  is  it  necessary  to  force 
people  to  evade  the  laws  in  order  to  carry  on  business  ? 

Among  the  important  laws  that  have  a  distinct  bearing 
on  the  banking  situation,  and  that  are  in  great  need  of 
revision,  I  should  specify  the  following: 

In  the  first  place  is  to  be  put  the  usury  legislation  of 
our  separate  states  and  especially  of  New  York.  The 
usury  laws  in  Europe,  where  they  exist  at  all,  apply  only 
where  the  borrower  is  in  dire  distress  when  seeking  and 
accepting  a  loan,  and  where  the  individual  or  corporate 
lender  knowingly  profits  from  his  helpless  situation  when 
exacting  usurious  rates.  Usury  can  be  judged  only  in  the 
light  of  the  surrounding  circumstances ;  and  usury  laws  in 
Europe  generally  apply  only  to  individuals.  Our  law, 
which  prevents  solvent  firms  of  bankers,  merchants,  manu- 
facturers, or  brokers  from  contracting  for  money  on  time 
at  more  than  six  per  cent,  implies  not  only  undignified 
tutelage,  but  unsound  business  judgment.  The  recent 
crisis  has  shown  that  it  was  not  taking  advantage  of  peo- 
ple in  need  to  give  them  money  on  time  at  over  six  per 
cent ;  on  the  contrary,  it  would  have  been  a  blessing, 
and  in  many  cases  their  salvation,  if  they  had  been  able 
to  receive  the  money  at  even  a  much  higher  rate.  This 
unsound  and  completely  indefensible  usury  law  is,  how- 


AMERICAN   AND   EUROPEAN   BANKING  143 

ever,  the  reason  why  we  must  have  daily  settlements,  and 
in  this  and  other  ways  it  indirectly  leads  to  frequent  con- 
vulsions of  our  money  rates. 

Secondly,  the  lack  of  a  modern  system  for  discounting 
commercial  paper  in  the  United  States  is  due  to  the  want 
of  uniformity  and  precision  in  the  laws  governing  bills  of 
exchange,  bankruptcy,  etc.  This  uncertainty  as  to  pro- 
cedure forces  us  to  prefer  the  well-defined  promissory 
note  —  however  unsalable  —  to  the  business  of  accepting 
and  indorsing  commercial  paper  at  the  low  commissions 
customary  in  Europe.  Furthermore,  since  our  commer- 
cial business  is  chiefly  financed  by  the  national  banks,  it  is 
a  foolish  regulation  that  prevents  their  indorsing  or  accept- 
ing such  paper  to  any  extent,  in  order  that  they  may  carry 
out  the  purely  secondary  object  of  issuing  bank-notes. 

Another  difference  between  Europe  and  America  that 
affects  the  banking  business  is  the  regulation  of  the  issue 
of  securities. 

"Stock  watering,"  that  is,  capitalization  of  earning 
power  and  of  good  will,  is  permitted  in  England  and  France, 
while  it  is  not  allowed  in  Germany.  While,  personally, 
I  prefer  the  German  system,  it  is  a  mistaken  idea  to  think 
that  the  capitalization  of  earning  power  necessarily  means 
taking  advantage  of  somebody.  If  the  German  sells  at 
two  hundred  per  cent  an  industrial  stock  paying  ten  per 
cent  dividends,  it  amounts  to  the  same  as  if  the  English- 
man had  sold  at  par  twice  the  amount  of  shares  on  which 
five  per  cent  dividend  is  paid.  But  whether  we  adopt  the 
one  system  or  the  other,  it  is  of  the  first  importance  that 
the  public  should  be  fully  informed  as  to  the  real  value 
of  the  stock  which  it  acquires,  and  that  the  law  should 
be  clear  and  definite  in  its  terms  and  equal,  rather  than 
erratic,  in  its  enforcement. 

In  Germany  the  law  makes  all  public  offerings  of 
securities  and  applications  for  listing  on  the  stock  exchange 


144         THE  CURRENCY  PROBLEM 

dependent  on  the  publication  of  a  full  prospectus.  This 
document  must  contain  all  facts  of  importance  concern- 
ing the  security  offered  and  must  be  submitted  to,  and 
approved  by,  a  state  commissioner.  Anybody  withhold- 
ing information,  or  furnishing  wrong  and  misleading 
information,  is  criminally  liable.  At  the  same  time,  the 
law  requires  that  balance  sheets  be  published  regularly 
and,  where  the  issue  deals  with  a  new  flotation,  the 
prospectus  must  state  clearly  the  value  and  the  price  of 
the  properties  transferred  to  the  corporation  at  the  time 
of  its  incorporation,  and  in  certain  cases  also  the  names 
of  those  from  whom  they  were  bought. 

We  come  finally  to  one  of  the  most  important  of  the 
subsidiary  points  affecting  our  banking  system,  namely, 
the  relation  of  the  directors  to  the  corporation.  In  most 
of  the  European  countries,  particularly  in  Germany  and 
France  and,  to  a  certain  extent,  in  England,  this  relation 
departs  radically  from  our  custom.  The  French  and  Ger- 
man corporation  is  managed  by  a  board  of  directors  and 
salaried  managers.  The  latter  are  not  members  of  the 
board,  as  is  the  managing  president  with  us.  The  board 
of  directors  in  Europe  supervise  the  managers,  who  have 
to  report  to  the  board  about  their  acts  and  proposed  acts, 
in  order  to  secure  their  sanction.  The  rule  is  that  both  the 
managing  officers,  whose  fixed  salaries  are  comparatively 
small,  and  the  board  of  directors  share  in  the  profits  of 
the  company.  The  stockholders  ordinarily  receive  the 
first  four  per  cent,  while  of  the  surplus  over  four  per  cent, 
a  certain  proportion  goes  to  the  managing  officers  and 
their  staff  and  to  the  board  of  directors.  As  the  corporation 
grows,  the  percentage  going  to  the  directors  and  the  man- 
agers is  frequently  modified  to  whatever  the  shareholders 
consider  a  fair  compensation.  The  net  profit  of  the  forty- 
five  important  German  banks  for  1906  was  M.  231,000,000. 
The  aggregate  capital  of  these  banks  was  M.  2,198,000,000 


AMERICAN   AND   EUROPEAN   BANKING  145 

with  a  surplus  of  M.  542,000,000,  making  their  total 
resources  M.  2,740,000,000.  Of  this  net  profit  about 
M.  200,000,000  were  paid  out ;  about  one-seventh,  viz. 
M.  28,000,000,  was  paid  to  the  managers  and  staff  and 
to  the  directors,  while  the  remaining  six-sevenths,  being 
M.  171,000,000,  were  paid  to  the  stockholders,  being  an 
average  dividend  of  8.07  per  cent. 

The  underlying  idea  is  a  very  different  one  from  our 
own.  The  European  maintains  that,  in  order  to  hold 
any  one  liable  in  case  he  does  not  perform  his  duty,  one 
ought  to  pay  him  if  he  does.  In  Germany,  for  instance, 
if  a  director  does  not  act  with  what  would  be  deemed 
ordinary  business  prudence,  and  if  he  neglects  his  duties, 
so  that  the  company  suffers  loss,  he  is  made  personally 
liable.  In  the  very  rare  cases  of  bad  bank  failures  which 
Germany  has  witnessed,  like  that  of  the  Leipziger  Bank, 
—  which,  however,  owing  to  Germany's  admirable  sys- 
tem, passed  by  without  any  panic,  — the  directors,  amongst 
whom  were  men  of  many  millions,  lost  all  they  pos- 
sessed. 

While  the  law  is  thus  very  rigid,  it  does,  on  the  other 
hand,  not  require  the  director  to  be  anything  more  than 
honest,  or  than  to  use  the  utmost  possible  care.  But  the 
board  members  in  a  bank,  who  receive  quite  a  large 
income  through  their  share  of  the  profits,  realize  that 
they  must  in  turn  devote  a  good  part  of  their  time 
and  energies  to  the  interests  of  the  bank.  All  corpora- 
tions, like  the  big  shipping  lines,  the  industrial  concerns, 
and  the  insurance  companies,  are  run  exactly  on  the  same 
system.  As  a  result,  the  so-called  dummy  director,  so 
familiar  to  us,  does  not  exist,  because  every  director  is 
materially  concerned  in  seeing  to  it  that  the  interests  of 
the  company  are  fully  safeguarded  at  all  times,  and  that 
no  one  director  or  manager  receives  any  profits  that 
might  be  detrimental  to  the  corporation;    while  at  the 


146         THE  CURRENCY  PROBLEM 

same  time  this  system  makes  the  directors  disinclined 
to  consent  to  over-capitalization. 

With  us,  on  the  other  hand,  the  laws  and  usages  regu- 
lating the  relations  of  director  to  stockholder  need  much 
modernizing.  We  do  not  pay  our  directors,  for  ten  dollars 
or  so  per  meeting  cannot  be  considered  a  remuneration. 
Under  the  old  system  it  was  considered  good  style  to  be 
on  the  board  of  a  bank,  as  it  was  to  be  on  philanthropic, 
religious,  or  educational  boards;  membership  was,  in 
fact,  largely  a  social  function.  Or,  on  the  other  hand, 
some  individuals  were  willing  to  join  a  board  without  any 
compensation,  because  it  was  their  own  business  that 
they  were  managing;  e.g.  their  own  railroad,  for  which 
they  had  to  supply  the  wherewithal  themselves,  and  the 
territory  of  which  they  had  to  open  by  taking  up  farming 
or  mining  or  by  starting  other  industries.  In  such  cases 
they  sometimes  made  money  and  sometimes  suffered 
heavy  losses ;  but  on  the  whole,  it  was  this  system  of  di- 
rectors as  chief  stockholders  and  ever  active  prospectors, 
assuming  large  risks  themselves,  that  developed  the 
country  and  made  it  what  it  is  to-day. 

In  the  course  of  time,  however,  as  the  corporations  grew 
in  size  and  number,  directorship  ceased  to  be  a  social 
function,  and  the  corporations  ceased  to  be  the  property 
of  a  few.  They  became  the  property  of  a  large  com- 
munity of  stockholders,  and  the  directors,  from  being 
majority  stockholders,  slowly  became  trustees. 

With  the  evolution  of  the  modern  conception  of  trustee- 
ship has  come  the  present  tendency  to  endeavor  to  tie  the 
director  hand  and  foot  and  to  hold  him  liable  if  anything 
goes  wrong  with  the  corporation.  But  let  me  ask,  what 
right  has  one  shareholder  substantially  to  say  to  the  other : 
"Go  on  the  board,  work  for  me,  worry  for  me,  give  your 
time  and  spend  your  energy :  we  shall  not  pay  you  for  it ; 
but  I  shall  hold  you  strictly  accountable  if  anything  happens 


AMERICAN  AND   EUROPEAN   BANKING         147 

to  my  company.  If  you  chance  to  have  a  business  of  your 
own,  and  if  you  find  anytime  left  for  it,  be  very  careful  not  to 
do  any  business  with  my  company.  Leave  that  privilege  to 
me.  Because  you  work  for  me,  you  lose  that  privilege ;  and 
because  I  do  not  work  for  you  — I  retain  it."  That  is 
virtually  the  present  attitude  of  the  American  stockholder 
and  to  a  certain  degree  the  legal  status  of  the  director. 
Let  us  do  as  the  Europeans  do,  let  us  remunerate  our 
directors  in  proportion  to  the  dividends  they  earn  for  us, 
and  then  we  shall  not  only  have  the  full  right  to  hold 
them  liable  and  to  ask  them  to  give  up  certain  privileges, 
but  we  shall  at  the  same  time  have  greater  certainty  that 
every  director  will  be  careful  to  do  his  best. 

Banking,  like  almost  all  other  commercial  transactions, 
is  in  reality  an  insurance  business.  For  each  risk,  we 
ask  and  receive  a  premium  commensurate  with  the  hazard 
of  the  transaction.  In  a  city  built  on  volcanic  ground  the 
insurance  premium  is  high.  Bankers'  profits  in  America 
are  higher  than  in  Europe;  but  they  must  be  high  so 
long  as,  for  lack  of  modern  banking  methods  and  of  uni- 
form and  well-established  laws,  we  live  financially  on 
volcanic  ground.  We  have  just  passed  through  a  pretty 
lively  earthquake,  and  the  losses  which  wiped  out  the 
profits  of  years  show  conclusively  that  the  premiums 
earned  were  not  too  large,  in  proportion  to  the  risk.  Do 
not  let  us  blame  the  insurance  company,  but  let  us  be 
doubly  careful  to  build  only  in  steel  and  stone  and  let  us 
build  on  solid  ground.  For,  luckily,  in  this  instance  it 
is  within  our  power  to  transform  that  volcanic  ground  into 
a  solid  foundation. 

We  are  apt  to  think  that  our  problems  are  peculiar  to 
us  and  that  we  must  find  our  own  way  of  solving  them. 
If  we  had  only  realized  that  American  and  European 
history  is  being  written  with  the  same  ink,  that  man  is 
man,  with  similar  virtues  and  similar  vices,  on  both  sides 


148         THE  CURRENCY  PROBLEM 

of  the  Atlantic,  we  might  have  learned  much  from  ex- 
perience, and  might  have  been  able  to  avoid  much  ama- 
teurish and  harmful  legislation. 

Germany  also  had  many  sovereign  states  which  ulti- 
mately formed  a  union.  In  each  of  these  states  there  was 
a  different  legal  system,  — German  law,  Roman  law, 
Code  Napoleon  and  all  kinds  of  local  laws.  Yet 
Germany  organized  a  commission,  which  worked  for 
twenty-five  years  and  which  finally  completed  a  code 
of  laws  to  govern  the  entire  country.  A  uniform  com- 
mercial code  had,  in  fact,  been  created  far  earlier,  and 
Germany  has  now  for  many  years  been  enjoying  the  ad- 
vantages of  uniformity.  With  us,  also,  there  are  surely 
many  questions,  social  as  well  as  commercial,  on  which 
the  East  and  the  West,  the  North  and  the  South,  can 
agree,  and  where  uniformity  of  state  legislation  can  be 
secured  —  if  for  no  other  reason  than  to  avoid  the  much 
disliked  federal  regulation. 

In  Germany,  Sweden,  and  Switzerland — the  last  of 
the  countries  to  adopt  a  central  bank  —  we  find  that 
obstinate  opposition  was  long  directed  against  the  creation 
of  such  a  central  institution,  chiefly  by  the  then  exist- 
ing numerous  banks  of  issue,  which  feared  lest  their  busi- 
ness might  suffer.  In  each  country  in  turn  the  very 
banks  that  were  forced  to  abandon  the  right  of  issue 
in  order  to  become  banks  of  discount  and  deposit  acknowl- 
edge to-day  that  they  have  derived  nothing  but  profit  from 
the  change,  and  that  the  central  bank  has  conferred  unal- 
loyed benefit  on  the  entire  country. 

V 

While  our  investigation  has  disclosed  the  nature  of  the 
ideal,  it  has,  at  the  same  time,  also  made  it  evident  that 
we  are  still  far  removed  from  this  ideal;  so  far,  in  fact, 
that  any  attempt  to  reach  it  immediately  would  be  futile. 


AMERICAN   AND   EUROPEAN   BANKING  149 

We  can,  indeed,  advance  only  step  by  step,  but  I  am  con- 
vinced that  we  shall  never  attain  the  summit  of  our  am- 
bitions or  reach  a  completely  satisfactory  condition  until 
we  have  worked  our  way  to  a  central  bank  and  to  the  adop- 
tion of  clear  and  equitable  statutes.  We  cannot  secure 
uniform  laws  promptly,  but  we  can  begin  by  modifying 
some  of  the  laws  mentioned  above,  which  are  incompatible 
with  common  sense,  and  by  creating  truly  responsible 
boards  of  directors  like  those  in  Europe. 

We  cannot  have  an  effective  modern  central  bank,  be- 
cause there  are  no  modern  American  bills  of  exchange, 
and  we  cannot  create  a  sufficient  amount  of  modern  paper 
without  a  central  bank.  We  cannot  have  stock -exchange 
settlements  without  the  abolition  of  the  usury  law;  but 
even  after  its  abolition  we  must  have  a  bill  market,  before 
we  can  do  away  with  daily  settlements  and  call  loans, 
based  on  these  daily  transactions.  Nevertheless,  every 
one  of  these  changes  will  have  to  be  effected  some  day,  and 
it  is  all  important  that  each  successive  step  in  currency 
and  banking  reform  be  made  with  this  end  in  view. 

From  this  standpoint  it  is  evident  why  neither  the 
Aldrich  bill  nor  the  Fowler  bill  can  be  deemed  to  be  a 
step  in  the  right  direction.  Every  measure  is  bad  which 
accentuates  decentralization  of  note  issue  and  of  reserves ; 
or  which  exclusively  uses  bonds  as  a  basis  for  additional 

circulation; 
or  which  gives  to  commercial  banks  power  to  issue 
additional  notes  against  their  general  assets  with- 
out restricting  them  in  turn  in  the  scope  of  their 
general  business,  and  without  creating  some  ad- 
ditional independent  control,  indorsement,  or  guar- 
anty; 
or  which  gives  arbitrary  powers  exclusively  to  political 
officers,  often  untrained  in  business,  and  usually  hold- 
ing office  only  for  a  short  period. 


150         THE  CURRENCY  PROBLEM 

A  central  clearing  house,  with  power  to  issue  against 
clearing-house  certificates  notes  to  be  guaranteed  by  the 
United  States,  would,  in  my  judgment,  form  the  best 
solution  for  the  time  being.  The  creation  of  a  central 
clearing  house  with  a  capital  of  its  own  and  with  a  limited 
dividend,  the  surplus  revenue  going  to  the  United  States, 
would  leave  present  conditions  undisturbed,  and,  while 
offering  immediate  relief,  would  at  the  same  time  form 
a  sound  basis  for  future  developments.  The  plan  would 
possess  the  following  advantages  :  — 

1.  The  clearing  house  would  have  its  own  gold  reserve. 

2.  It  would  centralize  the  additional  note  issue  and 
would  therefore  do  better  service  in  permitting  legitimate 
expansion  as  well  as  in  forcing  effective  contraction, 
which,  with  sixty-five  hundred  independent  note  issuers, 
is  well-nigh  impossible. 

While  additional  notes  issued  by  a  bank  mean  an  in- 
crease of  deposits,  which  may  perhaps  be  called  any  day 
or  which,  on  the  other  hand,  may  remain  forever,  an 
advance  by  the  central  clearing  house  would  be  made  to 
the  banks  for  a  given  period,  after  which  the  money  must 
be  returned.  It  would,  therefore,  be  safer  for  the  banks, 
and  would  at  the  same  time  insure  contraction  after  a 
certain  time,  as  in  Europe. 

3.  The  central  clearing  house  would  be  able  to  accommo- 
date commerce  and  industry  in  times  of  need  by  accepting 
commercial  assets,  provided  that  they  are  recognized 
as  legitimate  and  safe  by  the  indorsement  of  the  local 
clearing  houses. 

4.  It  would  leave  our  national  banks  without  any  further 
independent  note-issuing  power,  and  would  in  this  re- 
spect be  beneficial;  for  additional  note-issuing  power 
should  logically  carry  with  it  further  restrictions  as  to 
their  privilege  of  doing  a  commercial  business,  whereas 
their  privileges  in  this  respect  should  rather  be  increased. 


AMERICAN   AND   EUROPEAN   BANKING  151 

5.  Through  the  share  in  the  profits  reserved  for  the  gov- 
ernment, the  latter  would  receive  some  return  on  the  funds 
which  it  would  deposit  with  the  banks  through  the  central 
clearing  house,  whereas  at  present  the  government  does 
not  receive  any  such  return. 

6.  It  would  form  a  medium  through  which  gold  loans 
might  be  contracted  with  European  government  banks  in 
a  way  similar  to  that  by  which  transactions  have  been 
concluded  between  the  Bank  of  England  and  the  Banque 
de  France. 

7.  If  there  were  formed  to  supervise  the  manage- 
ment of  the  central  clearing  house  a  central  board  ad- 
ministered by  salaried  managers,  as  in  Europe,  and 
comprising  business  men,  largely  selected  from  the 
clearing-house  committees,  as  well  as  political  officials,  it 
would  eliminate  the  arbitrary  powers  which  the  Secre- 
tary of  the  Treasury  is  now  called  upon  to  exercise, 
and  it  would  create  a  continuity  of  policy,  which  is  most 
essential  for  the  development  of  the  country. 

8.  Finally,  it  would  show  that  this  country  is  able  to 
produce  a  body  of  men  as  honest,  as  trustworthy,  and  as 
efficient  as  those  into  whose  hands  Europe  has  confided 
the  care  of  its  central  banks.  As  the  confidence  in  this 
body  grows,  as  the  banks  come  to  feel  its  beneficent  in- 
fluence, the  powers  of  this  clearing  house  may  gradually 
be  increased,  and  thus  from  the  joint  indorsement  by  the 
clearing  houses  we  may  gradually  gain  our  way  to  the 
indorsement  and  acceptance  by  individual  banks,  so  that 
we  may  finally  be  able  to  develop  a  central  organ  which, 
safeguarded  from  political  and  from  financial  domina- 
tion and  rigidly  restricted  as  to  its  scope  of  business,  will 
place  us  financially  in  a  sound  and  healthy  condition  and 
which  will  cause  us  in  this  domain,  as  in  others,  to  be 
respected  as  a  modern  and  a  completely  civilized  nation. 


THE   MODERN   CORPORATION 

BY 

GEORGE   W.   PERKINS 


THE   MODERN   CORPORATION 

In  the  modern  corporation  we  are  confronted  with  a 
fact  and  not  a  theory.  Whatever  may  be  the  individual 
attitude  toward  it,  the  corporation  is  here.  What  caused 
it,  what  it  is  doing,  and  what  is  to  become  of  it  are  live 
questions,  vital  to  all  the  people. 

A  corporation,  in  a  way,  is  but  another  name  for  an 
organization.  Broadly  speaking,  the  first  form  of  organi- 
zation between  human  beings,  of  which  we  know,  was 
the  clan  or  tribe,  in  which  the  everyday  conduct  of  the 
individuals  was  determined  by  the  necessities  of  the 
group.  This  passed  on  into  national  organization,  and 
then  came  the  church  as  a  growing  and  vast  organiza- 
tion.    Latest  of  all  has  come  the  organizing  of  business. 

But  before  all  this,  in  the  very  beginning  of  things, 
the  universe  was  organized;  and  all  that  man  has  done 
in  society,  in  the  church,  in  business,  and  all  that  he  ever 
can  do  in  the  centuries  to  come,  can  never  bring  to  pass 
so  complete  a  form  of  organization,  so  vast  a  trust,  so 
centralized  a  form  of  control,  as  passes  before  our  eyes 
in  each  twenty-four  hours  of  our  lives  as  we  contemplate 
that  all-including  system  of  perfect  organization  called 
the  Universe.  It  does  not  require  a  very  vivid  imagina- 
tion to  picture  the  waste,  the  destruction,  the  chaos,  that 
would  follow  if  there  were  not  perfect  organization,  perfect 
cooperation,  perfect  regulation,  perfect  control  in  the 
affairs  of  the  universe.  How  could  we  live,  for  example, 
if  there  were  constant  competition  between  day  and 
night  or  a  constant  struggle  for  supremacy  between  the 
seasons?     Does  any  one,  for  a  moment,  think  that  he 

155 


156         THE  CURRENCY  PROBLEM 

would  prefer  such  a  condition  to  the  cooperation  that 
now  exists  through  all  the  affairs  of  the  universe  ? 

Organization  being  the  all-permeating  principle  of  the 
universe,  the  presumption  is,  therefore,  in  favor  of  organi- 
zation wherever  we  find  it  or  wherever  it  can  be  used. 
The  corporation  of  to-day  is  entitled  to  that  presumption ; 
its  underlying  cause  is  not  the  greed  of  man  for  wealth 
and  power,  but  the  working  of  natural  causes  —  of 
evolution. 

Business  was  originally  done  by  individuals  trading  with 
one  another ;  then  by  a  firm  of  two  or  more  individuals ; 
then  by  a  company;  then  by  a  corporation,  and  latterly 
by  a  giant  corporation  or  what  is  commonly  (though 
perhaps  inaccurately)  called  a  "trust."  Each  step  was 
brought  about  by  some  great  change  that  took  place  in 
the  conditions  under  which  the  people  of  the  world  lived 
and  worked;  each  step  was,  in  fact,  mainly  determined 
by  discoveries  and  inventions  of  the  human  mind. 

With  the  ox-team  and  the  hoe  we  had  men  trading  as 
individuals  with  individuals;  with  the  sailing  vessel  and 
the  stage-coach  we  had  trade  carried  on  by  firms;  with 
the  advent  of  the  company  we  had  the  locomotive,  the 
steamboat,  the  reaping  machine,  and  the  telegraph; 
with  the  birth  of  the  larger  corporation  we  had  the  express 
train,  the  Atlantic  cable,  the  ocean  liner,  the  local  tele- 
phone, the  seeder,  the  reaper,  and  the  binder;  with  the 
giant  corporation  came  the  Twentieth  Century  Limited, 
the  crossing  of  the  ocean  in  five  days,  the  long-distance 
telephone,  wireless  telegraphy,  and  a  great  extension  of 
machinery  into  agricultural  work. 

In  our  forefathers'  time  it  took  about  half  as  long  to 
sail  down  the  Hudson  River  from  Albany  to  New  York 
as  it  now  takes  to  cross  the  Atlantic.  The  actual  distance 
from  Albany  to  New  York  is  no  less,  nor  is  the  distance 
from  New  York  to  London  any  less,  now  than  then ;  but 


THE   MODERN   CORPORATION  157 

the  inventions  of  man  have  so  compressed  both  space 
and  time  that  the  financial  and  commercial  markets  of 
America  and  Europe  are  in  constant  exchange  with  one 
another  every  moment  of  the  day.  The  business  man  in 
New  York  or  Chicago  can  exchange  several  cable  messages 
with  London  or  Paris  during  the  business  hours  of  a  day, 
and  whenever  an  hour  is  clipped  off  the  record  of  an  ocean 
greyhound  the  people  of  the  world  are  drawn  so  much 
nearer  together.  Because  of  the  inventions  of  man,  the 
great  American  desert  of  our  boyhood  geographies  has, 
within  a  comparatively  few  years,  largely  become  a  vast 
fertile  field;  and,  again  because  of  these  inventions, 
coupled  with  organized  business  methods,  the  product  of 
this  vast  field  is  being  marketed  in  remote  parts  of  the 
globe. 

The  days  when  business  was  a  local  affair  of  individual 
with  individual  were  the  days  when  people  were  scattered, 
knowing  little  of  each  other  and  having  no  dealings  with 
each  other  outside  the  radius  of  a  few  miles.  Then 
steam  and,  later,  electricity  came  into  man's  service; 
and  then,  by  leaps  and  bounds,  the  possibilities  of  trade 
became  extended  to  a  radius  of  hundreds  of  miles,  even  of 
thousands  of  miles.  Vast  possibilities  of  international 
trade  loomed  up.  The  corporation  sprang  into  active 
being  as  an  inevitable  result  of  this  expansion  of  trade; 
for  no  one  man,  no  firm,  no  small  company,  could  provide 
the  capital  or  the  organization  to  cope  with  such  oppor- 
tunities. The  only  bridge  that  can  span  the  ocean  is  the 
corporation.  The  real  cause  of  the  corporation  was  not 
so  much  the  selfish  aims  of  a  few  men  as  the  imperative 
necessities  of  all  men. 

The  first  stage  of  corporationism  was  one  of  conflict  — 
the  old  destructive  competition  carried  forward  under 
the  new  business  forms.  Trade  could  be  carried  farther, 
much  farther  than  before ;  and  so  A  invaded  B's  territory 


158         THE  CURRENCY  PROBLEM 

and  B  retaliated.  The  fighting  became  faster  and  more 
furious,  and  the  war  in  commerce  became  a  hand-to- 
hand  conflict.  The  trenches  were  being  filled  with  able, 
splendid  men  who  fell  in  the  colossal  struggles.  Cut 
rates  and  rebates  became  the  order  of  the  day.  Many 
railroads  and  many  houses  which  had  been  successful  in 
legitimate  lines  of  business  went  down  in  bankruptcy. 
Labor  suffered  and  the  public  suffered.  The  cost  of 
doing  business  steadily  increased,  for  war  costs  money. 
It  became  imperative  that  something  be  done  to  end 
the  havoc.  Prosperity  could  come  only  with  peace.  In- 
stinctively, in  a  way  unconsciously,  men  began  to  get 
together,  not  so  much  for  profit  as  for  protection ;  and 
so,  under  conditions  which,  in  the  mechanical  develop- 
ment of  the  world,  came  on  as  naturally  as  day  follows 
night,  the  great  corporation  came  into  existence  and  is  the 
live,  burning  issue  of  to-day. 

Perhaps  the  most  useful  achievement  of  the  great  cor- 
poration has  been  the  saving  of  waste  in  its  particular 
line  of  business.  By  assembling  the  best  brains,  the  best 
genius,  the  best  energy  in  a  given  line  of  trade,  and  co- 
ordinating these  in  work  for  a  common  end,  great  results 
have  been  attained  in  the  prevention  of  waste,  the  utiliz- 
ing of  by-products,  the  economizing  in  the  manufacture 
of  the  product,  the  expense  of  selling,  and  through  better 
and  more  uniform  service. 

This  same  grouping  of  men  has  raised  the  standard  of 
their  efficiency.  Nothing  develops  man  like  contact  with 
other  men.  A  dozen  men  working  apart  and  for  separate 
ends  do  not  develop  the  facility,  the  ideas,  the  general 
effectiveness  that  will  become  the  qualities  of  a  dozen 
men  working  together  in  one  cause.  In  such  work  emula- 
tion plays  a  useful  part ;  it  does  all  the  good  and  none  of 
the  harm  that  the  old  method  of  destructive  competition 
did :  the  old  competition  was  wholly  self-seeking  and  often 


THE   MODERN   CORPORATION  159 

ruinous,  while  the  new  rivalry,  within  the  limits  of  the 
same  organization,  is  constructive  and  uplifting.  Thus 
the  great  corporation  has  developed  men  of  a  higher  order 
of  business  ability  than  ever  appeared  under  the  old  condi- 
tions; and  what  a  value  this  has  for  the  coming  genera- 
tion !  The  opportunity,  the  inducement  it  provides  to 
become  all-around  larger  men  than  those  of  earlier 
generations  could  become ! 

We  have  heard  many  warnings  that  because  of  the  great 
corporation  we  have  been  robbing  the  oncoming  genera- 
tion of  its  opportunities.  Nothing  is  more  absurd. 
The  larger  the  corporation,  the  more  certain  is  the  office 
boy  ultimately  to  reach  a  foremost  place  if  he  is  made 
of  the  right  stuff,  if  he  keeps  overlastingly  at  it,  and 
if  he  is  determined  to  become  master  of  each  position  he 
occupies. 

In  the  earlier  days  the  individual  in  business  left  his 
business,  as  a  rule,  to  his  children — the  firm  to  its  relations. 
Whether  or  not  they  were  competent  did  not  determine 
the  succession.  But  the  giant  corporation  cannot  act 
in  this  way.  Its  management  must  have  efficiency,  — 
above  and  beyond  all  else  it  must  have  the  highest  order 
of  ability;  and  nothing  has  been  more  noticeable  in  the 
management  of  corporations  in  the  last  few  years  than  that 
"influence,"  so  called,  as  an  element  in  selecting  men  for 
responsible  posts,  has  been  rapidly  on  the  wane.  Every- 
thing is  giving  way  and  must  give  way  to  the  one  supreme 
test  of  fitness. 

And  is  it  not  possible  that  the  accumulating  of  large 
fortunes  in  the  future  may  be  curtailed  to  a  large  extent 
through  the  very  workings  of  these  corporations?  Are 
there  not  many  advantages  in  having  corporations  in 
which  there  are  a  large  number  of  positions  carrying  with 
them  very  handsome  annual  salaries,  in  place  of  firms 
with   comparatively  few  partners,  the  annual   profits  of 


160         THE  CURRENCY  PROBLEM 

each  one  of  whom  were  often  so  large  that  they  amassed 
fortunes  in  a  few  years  ?  A  position  carrying  a  salary  so 
great  as  to  represent  the  interest  on  a  handsome  fortune 
can  be  permanently  rilled  only  by  a  man  of  real  ability, 
so  that  in  case  a  man  who  is  occupying  such  a  position 
dies,  it  must,  in  turn,  be  filled  by  another  man  of  the 
same  order;  while  the  fortune  might  be,  and  most  likely 
would  be,  passed  on  regardless  of  the  heir's  ability.  There- 
fore, the  more  positions  of  responsibility,  of  trust,  and  of 
honor,  that  carry  large  salaries,  the  more  goals  we  have 
for  young  men  whose  equipment  for  life  consists  of  in- 
tegrity, health,  ability,  and  energy. 

Furthermore,  the  great  corporation  has  been  of  benefit 
to  the  public  in  being  able  to  standardize  its  wares,  so  that 
they  have  become  more  uniformly  good.  Wages  are  un- 
questionably higher  and  labor  is  more  steadily  employed, 
for,  in  a  given  line  of  trade,  handled  to  a  considerable 
extent  by  a  corporation,  there  are  practically  no  failures ; 
while,  under  the  old  methods  of  bitter,  relentless  warfare, 
failures  were  frequent,  and  failure  meant  paralysis  for 
labor  as  well  as  for  capital. 

The  great  corporation  is  unquestionably  making  general 
business  conditions  sounder.  It  is  making  business 
steadier,  for  one  reason,  because  firms  inevitably  change 
and  dissolve,  while  a  corporation  may  go  on  indefinitely. 
It  is  making  business  steadier,  for  another  and  more 
potent  reason,  because  it  is  able  to  survey  the  field 
much  better  than  could  a  large  number  of  firms  and  indi- 
vid  jals,  and,  therefore,  vastly  better  able  to  measure  the 
demand  for  its  output  and,  if  properly  managed,  to  prevent 
the  accumulation  of  large  stocks  of  goods  that  are  not 
needed  —  a  condition  which  often  arose  under  the  old 
methods,  when  many  firms  were  in  ruthless  competition 
with  one  another  in  the  same  line  of  business,  oftentimes 
producing  serious  financial  difficulties  for  one  and  all. 


THE   MODERN   CORPORATION  161 

Broadly  and  generally  speaking,  the  corporation  as  we 
know  it  to-day,  as  we  see  it  working  and  feel  its  results, 
is  in  a  formative  state.  In  many  cases  actual  and  des- 
perately serious  situations  caused  it  to  be  put  together 
hurriedly.  In  many  cases  serious  mistakes  have  been 
made  in  the  forms  of  organization,  in  the  methods  of 
management,  and  in  the  ends  that  have  been  sought.  In 
some  instances  the  necessity  for  corporations  has  grown 
faster  than  has  the  ability  of  men  to  manage  them. 
Yes,  mistakes  have  been  many  and  serious.  But  the  cor- 
poration is  with  us ;  it  is  a  condition,  not  a  theory,  and 
there  are  but  two  courses  open  to  us  —  to  kill  it  or  to 
keep  it.  If  you  would  kill  it,  you  must  kill  the  cause,  or 
the  thing  will  come  back  to  plague  you.  The  principal 
causes  are  steam  and  electricity. 

Could  anything  be  more  dangerous  to  the  public  welfare 
than  steam  and  electricity  themselves  ?  Then  why  not 
prohibit  their  use  and,  so  far  as  possible,  abolish  them? 
Has  any  one  ever  suggested  this  ?  No.  Why  ?  Because 
their  benefits  were  too  apparent ;  and  so  we  have  bent  our 
energies  towards  regulating  and  controlling  them  by  using 
all  that  is  good  in  them  and  carefully  protecting  our- 
selves from  all  that  is  injurious.  If  we  are  not  willing 
to  exterminate  the  cause  of  corporations,  we  can  never 
permanently  exterminate  the  corporation  itself.  There  is, 
then,  but  one  thing  left  to  do,  viz.  to  regulate  and  control 
them,  to  treat  them  as  we  have  treated  steam  and  elec- 
tricity, to  use  the  best  that  is  in  them  and  to  protect  our- 
selves from  the  worst  that  is  in  them. 

A  large  percentage  of  the  mistakes  of  corporate  manage- 
ment have  occurred  because  managers  have  failed  to 
realize  that  they  were  not  in  business  as  individuals, 
but  were  working  for  other  people,  their  stockholders, 
whom  they  were  in  honor  bound  honestly  and  faithfully 
to  serve;   further,  that  they  owed  a  duty  to  the  general 


162         THE  CURRENCY  PROBLEM 

public  and  could,  in  the  long  run,  best  serve  themselves 
and  their  stockholders  by  recognizing  that  duty  and  re- 
specting it. 

Then,  too,  many  of  our  corporations,  being  of  com- 
paratively recent  origin,  have,  at  the  outset,  been  managed 
by  men  who  were  previously  in  business,  in  some  form  or 
another,  for  themselves ;  and  it  has  been  very  difficult  for 
such  men  to  change  their  point  of  view  —  to  cease  from 
looking  at  questions  from  the  sole  standpoint  of  personal 
gain  and  personal  advantage,  and  to  take  the  broader 
view  of  looking  at  them  from  the  standpoint  of  the  com- 
munity of  interest  principle. 

It  is  by  no  means  clear  that  the  danger  point  in  the 
development  of  corporations  is  found  in  the  giant  corpora- 
tion. Indeed,  it  is  more  likely  to  be  found  in  the  corpora- 
tion of  lesser  size,  because  the  latter  does  not  attract  the 
eye  of  the  public  sufficiently  to  have  its  managers  impressed 
with  the  fact  that  they  are  semi-public  servants  —  respon- 
sible, not  only  to  their  stockholders,  but  to  the  public  as 
well.  It  is  easier  and  more  natural  for  a  giant  corporation 
to  adopt  a  policy  of  publicity  with  the  public  and  of  fair 
dealing  with  its  associates  in  the  same  trade,  because  such 
a  course,  from  the  broad,  far-reaching  view  of  the  great 
corporation,  becomes  the  wisest,  most  successful  course. 
Then  again,  the  relation  of  the  giant  corporation  to  its 
labor  is  an  entirely  different  relation  from  that  of  the  small 
corporation  or  the  firm  to  its  labor ;  the  officers  and  trustees 
of  a  giant  corporation  instinctively  lose  sight  of  the  interest 
of  any  one  individual  because  such  interest  at  best  is  in- 
finitesimal compared  with  the  whole.  This  places  the 
officers  and  trustees  of  the  giant  corporation  in  a  position 
where  they  can  look  on  all  labor  questions  without  bias 
and  without  any  personal  axe  to  grind  —  solely  from  the 
broadest  possible  standpoint  of  what  is  fair  and  right  be- 
tween the  public's  capital,  which  they  represent,  and  the 


THE   MODERN   CORPORATION  163 

public's  labor,  which  they  employ.  In  short,  they  assume 
on  all  such  matters  the  attitude  of  the  real  trustee,  the 
impartial  judge,  the  intelligent,  well-posted,  and  fair 
arbitrator. 

The  great  semi-public  business  corporations  of  the  coun- 
try, whether  they  be  insurance,  railroad,  or  industrial, 
have  in  our  day  become  not  only  vast  business  enterprises, 
but  great  trusteeships ;  and  there  would  be  far  less 
attacking  of  corporations  if  this  truth  were  more  fully 
realized  and  respected.  The  larger  the  corporation  be- 
comes, the  greater  become  its  responsibilities  to  the  entire 
community.  Moreover,  the  larger  the  number  of  stock- 
holders, the  more  it  assumes  the  nature  of  an  institution 
for  savings. 

It  is  not  sufficient  in  corporate  management  to  do  the 
best  one  can  from  day  to  day.  Corporate  responsibility 
extends  beyond  to-day.  It  is  the  foresight,  the  planning 
ahead,  the  putting  the  house  in  order  for  the  storms  of 
the  future,  that  are  the  true  measure  of  the  best  and 
highest  stewardship  as  well  as  of  the  highest  order  of 
managerial  ability. 

The  corporations  of  the  future  must  be  those  that  are 
semi-public  servants,  serving  the  public,  with  owner- 
ship widespread  among  the  public,  and  with  labor  so 
fairly  and  equitably  treated  that  it  will  look  upon  the 
corporation  as  its  friend  and  protector  rather  than  as  an 
ever-present  enemy,  above  all  believing  in  it  so  thor- 
oughly that  it  will  invest  its  savings  in  the  corporation's 
securities  and  become  working  partners  in  the  business. 
It  would  have  been  impossible,  in  the  day  of  the  ox-team, 
for  people  in  every  State  of  this  Union  to  be  partners  in 
any  one  business ;  and  yet  to-day  we  have  at  least  one 
giant  corporation  made  up  of  partners  resident  not 
only  in  every  one  of  our  States,  but  in  almost  every 
country  in  the  world,   and  reinforced   by  thousands   of 


164         THE  CURRENCY  PROBLEM 

its   own   employees  having  become   stockholders   them- 
selves. 

During  the  past  few  months,  when  the  campaign  against 
corporations  was  most  intense,  and  when  our  country  was 
in  a  turmoil  of  business  perplexity  and  doubt,  the  people 
who,  we  are  told,  have  so  suffered  because  of  the  trusts  and 
are  so  bitterly  opposed  to  their  existence,  have  been 
investing  in  these  very  securities  to  an  unprecedented 
extent.  To  illustrate :  during  the  past  year  the  stock- 
holders of  the  Great  Northern  Railway  have  increased 
in  number  from  2800  to  over  11,000.  The  stockholders 
of  the  Pennsylvania  Railroad  have  increased  from  40,000 
to  57,000.  The  stockholders  of  the  New  York  Central 
have  increased  from  10,000  to  over  21,000.  During  the 
same  period  the  number  of  the  stockholders  in  the  Steel 
Corporation  increased  by  over  30,000:  the  total  num- 
ber of  individuals  holding  stock  in  that  corporation 
now  exceeds  100,000,  and  the  average  holding  of  the 
$868,000,000  of  stock  of  the  Steel  Corporation  is  to-day 
about  98  shares  per  person.  Can  there,  then,  be  any 
question  that  these  great  institutions  have  become  semi- 
public,  and  when  we  contemplate  the  alternative  of  ex- 
terminating or  of  regulating  them,  must  we  not  realize 
that  they  are  owned,  not  by  a  few  individuals,  but  by  a 
vast  number  of  people  representing  our  thriftiest  class  ? 
That  these  corporations  have  thus  become  not  only  vast 
business  enterprises,  but  great  and  growing  institutions 
for  savings,  surely  imposes  a  new  and  more  sacred  re- 
sponsibility, not  only  upon  corporation  managers,  but 
upon  legislators   as   well. 

If  the  managers  of  the  giant  corporations  feel  themselves 
to  be  semi-public  servants,  and  desire  to  be  so  considered, 
they  must,  of  course,  welcome  supervision  by  the  public 
exercised  through  its  chosen  representatives  who  compos* 
the   government.     Those  who  ask  the  public  to  imst 


THE   MODERN   CORPORATION  165 

money  in  an  enterprise  are  in  honor  bound  to  give  the 
public,  at  stated  intervals,  evidence  that  the  business  in 
question  is  ably  and  honestly  conducted ;  and  they  should 
be  not  only  willing,  but  glad,  that  some  authority,  properly 
constituted  by  our  government,  should  say  to  stock- 
holders and  the  public  from  time  to  time  that  the  manage- 
ment's reports  and  methods  of  business  are  correct. 
They  should  be  willing  to  do  this  for  their  own  relief  of 
mind,  since  the  responsibility  of  the  management  of  a 
giant  corporation  is  so  great  that  the  men  in  control  should 
be  glad  to  have  it  shared  by  proper  public  officials  repre- 
senting the  people  in  a  governmental  capacity. 

There  is  scarcely  a  corporation  manager  of  to-day, 
who  is  alive  to  his  responsibilities,  to  the  future  growth 
of  this  country,  and  to  the  enormous  opportunities  before 
us  for  foreign  trade,  who  would  not  welcome  this  kind  of 
supervision  could  he  but  feel  that  it  would  come  from  the 
national  government,  acting  through  an  intelligent  and 
fair-minded  official.  To  be  faced,  however,  with  the  re- 
quirement to  report  to  and  to  be  supervised  and  regulated 
by  forty  or  fifty  governments,  with  varying  ideas  and  laws, 
of  course  suggests  difficulties  that  are  almost  insurmount- 
able obstacles.  For  business  purposes,  at  least  in  the 
larger  business  affairs  of  this  country  and  from  a  practical 
standpoint,  state  lines  have  been  obliterated.  The  tele- 
graph, the  express  train,  and  the  long-distance  telephone 
have  done  their  work.  For  business  purposes  in  this 
country  the  United  States  government  is  a  corporation 
with  fifty  subsidiary  companies,  and  the  sooner  this  is 
realized  the  sooner  we  can  get  the  right  kind  of  supervision 
of  semi-public  business  enterprises  and,  in  this  way,  give 
the  public  the  publicity  and  the  protection  to  which  it  is 
entitled  in  the  conduct  of  business  by  corporations.  In 
no  other  way  can  the  public  be  protected  from  evils  in 
corporation  management. 


166         THE  CURRENCY  PROBLEM 

The  criticism  is  often  made  that  this  would  amount  to 
bringing  business  into  politics.  That  depends.  We  have 
at  Washington  a  Supreme  Court.  Membership  in  that 
most  honorable  body  is  the  goal  of  every  aspiring  lawyer. 
If,  for  distinguished  service  and  ability,  we  honor  lawyers 
by  promoting  them  to  decide  our  most  difficult  legal 
questions,  why  should  we  not  honor  our  railroad  men  by 
promoting  them  to  decide  our  most  difficult  railroad 
questions,  our  industrial  men  the  industrial  questions  ? 
For  example :  if  we  had  at  Washington  a  Railroad  Board 
of  Control,  and  that  board  were  composed  of  practical  rail- 
road men,  would  not  membership  in  such  a  board  come 
gradually  to  be  the  goal  of  railroad  men  ?  And  does  any 
one,  for  a  moment,  think  that  if  such  a  board  were  com- 
posed of  practical  railroad  men  it  would  be  especially 
partial  to  railroad  interests  ?  Certainly  not.  Once  on 
such  a  board,  a  man  could  not  fail  to  recognize  the  great 
responsibility  and  honor  of  the  office  and  administer  it 
for  the  best  interests  of  the  public  and  of  the  railroads 
at  one  and  the  same  time.  Thus  the  business  man  would 
merge  into  the  public  official,  no  longer  controlled  by  the 
jUiere  business  view,  and  would  act  the  part  of  a  states- 
man, to  the  improvement  of  governmental  administration 
and  not  to  the  lowering  of  its  level. 

.  This  kind  of  expert,  high-minded  supervision  would 
not  be  opposed  by  the  business  interests  of  the  country. 
"VjVhat  they  dread  is  unintelligent,  inexperienced  adminis- 
tration. National  supervision,  under  a  law  requiring 
that  those  who  supervise  should  be  practical  men,  thor- 
c  mghly  versed  in  the  calling,  would  solve  most  of  our  diffi- 
cult problems  and  be  of  the  greatest  possible  benefit  and 
^protection  to  one  and  all. 

[  To  such  rational  supervision  may  we  not  look  forward 
cis  a  result  of  the  sober  second  thought  of  the  people  and 
Our  legislators,   of  their  calming  down  from  the  bitter 


THE   MODERN   CORPORATION  167 

denunciation  of  corporations  which  has  been  the  prevail- 
ing outcry  for  some  years? 

In  spite  of  what  apparently  has  been  an  almost  per- 
sistent determination  to  misunderstand  his  real  purpose, 
the  fact  is  that  President  Roosevelt,  from  the  time  that 
he  was  governor  of  New  York  down  to  his  message  to 
Congress  in  January,  1908,  has  repeatedly  proclaimed  his 
belief  that  modern  industrial  conditions  are  such  that 
combination  is  not  only  necessary  but  inevitable;  that 
corporations  have  come  to  stay,  and  that,  if  properly 
managed,  they  are  the  source  of  good  and  not  evil. 

The  next  period  in  corporation  development  should  be 
a  constructive  one,  constructive  as  to  the  relations  of  the 
corporation  to  its  labor  and  to  the  public,  and  this  can 
best  be  accomplished  by  the  method  of  cooperation  with 
supervision. 

It  is  almost  heresy  to  say  that  competition  is  no  longer 
the  life  of  trade.  Yet  this  has  come  to  be  the  fact,  as  ap- 
plied to  the  old  unreasoning  and  unreasonable  competi- 
tion, because  of  the  conditions  of  our  day.  The  spirit  of 
cooperation  is  upon  us.  It  must,  of  necessity,  be  the 
next  great  form  of  business  development  and  progress. 
At  this  moment  many  people  are  looking  askance  upon 
the  change,  still  believing  in  the  old  doctrine.  They  hold 
to  it  for  several  reasons  :  first,  because  they  have  inherited 
the  belief;  second,  because  they  think  that  competition 
means  lower  prices  for  commodities  to  the  public;  third, 
because  they  think  it  provides  the  best  incentive  to  make 
men  work.  This  may  have  been  the  best-known  method 
at  one  time,  but  it  is  not  and  cannot  be  true  in  the 
mechanical,  electrical  age  in  which  we  live. 

The  highly  developed  competitive  system  gave  ruinously 
low  prices  at  one  time  and  unwarrantedly  high  prices  at 
another  time.  When  the  low  prices  prevailed,  labor  was 
cruelly  hurt ;  when  the  high  prices  prevailed,  the  public 
paid  the  bills. 


168         THE  CURRENCY  PROBLEM 

From  every  point  of  view  the  cooperative  principle  is  to 
be  preferred.  It  is  more  humane,  more  uplifting,  and, 
with  proper  supervision,  must  provide  a  more  orderly 
conduct  of  business,  —  freer  from  failure  and  abuse, 
guaranteeing  better  wages  and  more  steady  employment 
to  labor,  with  a  more  favorable  average  price  to  the 
consumer,  one  on  which  he  can  depend  in  calculating 
his  living  expenses  or  making  his  business  plans. 

So  much  for  corporations.  Now  may  I  detain  you  a 
moment  longer  while  I  say  a  word  to  the  young  men  who 
are  here  to-day. 

How  hopeless  would  your  condition  be  if  the  world 
were  perfect,  if  there  were  nothing  left  for  you  to  do  to 
improve  conditions,  if  those  who  had  gone  before  had 
finished  the  job!  Really,  can  you  imagine  a  condition 
more  discouraging,  more  hopeless  to  an  oncoming  genera- 
tion ?  Happily,  this  is  not  your  situation.  Our  corpora- 
tions have  made  mistakes.  Many  of  these  have  been 
pointed  out.  Things  have  been  done  wrongly.  Many 
of  these  wrongs  are  now  being  corrected.  But  in  those 
mistakes,  in  that  mismanagement,  lies  the  opportunity  of 
the  man  of  to-day  and  of  the  young  man  of  to-morrow. 
Your  task  will  be  to  search  out  and  eliminate  the  bad  in 
all  that  has  preceded  you,  retaining  the  good,  preserving 
and  adding  to  it  for  the  benefit  of  yourselves  and  of  those 
who  follow  you. 

Let  us,  then,  take  the  best  that  we  find,  cut  out  the  worst 
that  we  find,  improve,  develop,  make  more  useful  and 
beneficial. 

In  this  great  country  of  ours  there  stands  out  preemi- 
nently the  inventive  genius,  the  masterful  ability,  the  re- 
sourcefulness, the  courage,  the  optimism  of  America's  busi- 
ness men.  At  no  period  in  the  world's  development  have 
there  been  in  any  given  country  at  any  one  time  so  many 


THE   MODERN   CORPORATION  169 

men  of  from  twenty  to  thirty  years  of  age,  standing  ready 
to  embrace  so  many  opportunities  and  to  move  on  to  such 
splendid  achievements,  as  we  have  in  our  United  States 
to-day.  It  cannot  be  possible  that  these  young  men  will 
be  pessimists,  that  they  will  miss  the  legion  of  oppor- 
tunities that  are  theirs ! 

I  wonder  if  many  of  you  realize  how  fortunate  in  one 
respect  alone  you  are  as  compared  with  the  young  men 
in  many  other  countries.  You  are  not  obliged  to  spend 
a  number  of  the  most  impressionable  years  of  your  lives 
in  compulsory  military  service,  learning  to  obey  orders 
which  have  no  relation  to  the  realities  of  life  and  its 
actual  successes.  Those  precious  years  in  this  country 
are  given  to  you  to  observe,  to  learn,  and  to  prepare  for 
the  practical  work  of  the  world.  Your  individuality  is 
not  hampered  or  circumscribed  by  your  being  molded 
into  a  machine  in  your  early  manhood.  You  are  free 
to  make  of  yourself  what  you  will.  What  would  the  young 
men  of  Europe  give  for  their  opportunities  if  some  magic 
wand  could  give  them  one  currency,  one  language,  one 
government,  one  people,  from  London  to  Moscow ! 

Success  does  not  come  by  chance.  It  is  an  opportunity 
that  has  been  lassoed  and  organized.  I  doubt  if  a  man 
ever  met  with  success,  worthy  to  be  called  success,  who 
was  not  an  optimist,  who  did  not  believe  in  something, 
heart  and  soul,  and  who  did  not  play  fair.  And  remember 
that  when  you  set  about  a  task  which  you  really  want 
to  accomplish,  the  work  involved  is  not  drudgery,  it  is 
the  most  invigorating  sort  of  play. 

Do  not  lose  your  red  blood ;  whatever  you  are,  wherever 
or  however  you  are  situated,  keep  your  heart  warm  and 
your  humanity  at  par.  Push  forward ;  be  of  good  cheer. 
Believe  in  our  people,  in  our  methods,  in  our  country, 
in  your  neighbor  and  in  yourself;  and  remember,  if 
you  are  going  into  business,  that,  after  all  is  said  and 


170         THE  CURRENCY  PROBLEM 

done,  —  after  your  fortune  is  made,  however  great  it 
may  be,  — ■  in  the  small  hours  of  the  night,  in  your  heart 
of  hearts,  the  thing  you  are  really  going  to  enjoy,  take 
satisfaction  in,  and  be  proud  of,  the  thing  that  will 
carry  you  over  the  rough  places,  that  will  keep  your 
heart  strong  and  your  brain  clear,  will  be  the  thought  of 
what  you  have  done  to  help  others,  what  you  have  left 
to  a  world  that  has  offered  so  much  to  you. 


j> 


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THE    MACMILLAN    COMPANY,  Agents 

64-66  FIFTH    AVENUE,   NEW  YORK 


itx  X\tt  Citg  of  S^jew  %oxk 

The  University  includes  the  following : 

Columbia  College,  founded  in  1754,  and  Barnard  College,  founded  in 
1889,  offering  to  men  and  women,  respectively,  programmes  of  study 
which  may  be  begun  either  in  September  or  February  and  which  lead 
normally  in  from  three  to  four  years  to  the  degrees  of  Bachelor  of 
Arts  and  Bachelor  of  Science.  The  programme  of  study  in  Columbia 
College  makes  it  possible  for  a  well  qualified  student  to  satisfy  the  re- 
quirements for  both  the  bachelor's  degree  in  arts  or  science  and  a  pro- 
fessional degree  in  law,  medicine,  technology  or  education  in  six,  five 
and  a  half  or  five  years  as  the  case  may  be. 

The  Faculties  of  Political  Science,  Philosophy  and  Pure  Science, 
offering  advanced  programmes  of  study  and  investigation  leading  to  the 
degrees  of  Master  of  Arts  and  Doctor  of  Philosophy. 

The  professional  schools  of 
Law,  established  in  1858,  offering  courses  of  three  years  leading  to  the 

degree  of  Bachelor  of  Laws. 
Medicine.     The  College  of  Physicians  and  Surgeons,   established  in 
1807,  offering  four-year  courses  leading  to  the  degree  of  Doctor 
of  Medicine. 
Mines>  founded  in  1863,  offering  courses  of  four  years  leading  to  de- 
grees in  Mining  Engineering  and  in  Metallurgy. 
Chemistry  and  Engineering,  set  apart  from  School  of  Mines  in  1896, 
offering  four-year  courses  leading  to  degrees  in  Chemistry  and 
in  Civil,  Electrical,  Mechanical  and  Chemical  Engineering. 
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of  two  years  leading  to  professional  diplomas  and  degrees  in  ele- 
mentary or  secondary  teaching  or  some  branch  thereof,  and 
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diplomas  in  Education. 
Fine  Arts,  offering  a  programme  of  indeterminate  length  leading  to  a 
certificate  or  a  degree  in  Architecture,  and  a  programme  in 
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offering  courses  of  two  and  three  years  leading  to  appropriate 
certificates  and  degrees. 
In  the  Summer  Session  the  University  offers  courses  giving  both 
general  and  professional  training  which  may  be  taken  either  with  or 
without  regard  to  an  academic  degree  or  diploma. 

Through  its  system  of  Extension  Teaching  the  University  offers 
many  courses  of  study  to  persons  unable  otherwise  to  receive  academic 
training. 

In  September,  1905,  two  Residence  Halls  were  opened  with  accom- 
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The  price  of  the  University  Catalogue  is  twenty-five  cents  post- 
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Columbia  University,  New  York,  N.  Y. 


FACULTY  OF  POLITICAL  SCIENCE 


Nicholas  Murray  Butler,  LL.D.,  President.  J.  W.  Burgess,  LL.D.,  Professor 
of  Political  Science  and  Constitutional  Law.  Munroe  Smith,  LL.D.,  Professor  of 
Roman  Law  and  Comparative  Jurisprudence.  F.  J.  Goodnow,  LL.D.,  Professor 
of  Administrative  Law  and  Municipal  Science.  E.  R.  A.  Seligman,  LL.D.,  Profes- 
sor of  Political  Economy  and  Finance.  H.  L.  Osgood,  Ph.D.,  Professor  of  History. 
Wm.A.  Dunning,  LL.D.,  Professor  of  History  and  Political  Philosophy.  J.  B.  Moore, 
LL.D.,  Professor  of  International  Law.  F.  H.  Giddings,  LL.D.,  Professor 
of  Sociology.  J.  B.  Clark,  LL.D.,  Professor  of  Political  Economy.  J.  H. 
Robinson,Ph.D.,  Professor  of  History.  W.  M.  Sloane,L.H.D.,  Professor  of  History. 
H.  R.  Seager,  Ph.D.,  Professor  of  Political  Economy.  H.  L.  Moore,  Ph.D., 
Professor  of  Political  Economy.  W.  R.  Shepherd,  Ph.D.,  Adjunct  Professor  of 
History.  J.  T.  Shotwell,  Ph.D.,  Adjunct  Professor  of  History.  G.  W.  Botsford, 
Ph.D.,  Adjunct  Professor  of  History.  V.  G.  Simkhovitch,  Ph.D.,  Adjunct  Pro- 
fessor of  Economic  History.  E.  T.  Devine,  LL.D.,  Professor  of  Social  Economy. 
Henry  Johnson,  Ph.D.,  Professor  of  History.  S.  McC.  Lindsay,  Ph.D.,  Professor 
of  Social  Legislation.  C.  A.  Beard,  Adjunct  Professor  of  Politics.  Rudolf  Leon- 
hard,  J.U.D.,  Kaiser  Wilhelm  Professor  of  German  History  and  Institutions,  1907-08. 
G.  J.  Bayles,  Ph.D.,  Lecturer  in  Ecclesiology.  E.  E.  Agger,  Ph.D.,  Lecturer  in 
Economics. 


SCHEME   OF   INSTRUCTION 
GROUP  I.     HISTORY  AND  POLITICAL   PHILOSOPHY. 

Subject  A.  Ancient  and  Oriental  History,  nine  courses.  Subject  B.  Mediae- 
val History,  six  courses.  Subject  C.  Modern  European  History,  eight  courses. 
Subject  D.  American  History,  eleven  courses.  Subject  E.  Political  Philosophy, 
three  courses.  Courses  in  church  history  given  at  the  Union  Seminary  are  open  to 
the  students  of  the  School  of  Political  Science. 

GROUP  II.     PUBLIC  LAW  AND  COMPARATIVE  JURISPRUDENCE. 

Subject  A.  Constitutional  Law,  four  courses.  Subject  B.  International  Law, 
four  courses.  Subject  C.  Administrative  Law,  seven  courses.  Subject  D.  Roman 
Law  and  Comparative  Jurisprudence,  seven  courses.  Courses  in  Law  given  in  the 
Columbia  Law  School  are  open  to  the  students  of  the  School  of  Political  Science. 

GROUP  III.     ECONOMICS  AND  SOCIAL  SCIENCE. 

Subject  A.  Political  Economy  and  Finance,  twenty  courses.  Subject  B. 
Sociology  and  Statistics,  ten  courses.  Subject  C.  Social  Economy,  three  courses. 
Courses  in  Economics  and  Social  Economy  given  in  the  School  of  Philanthropy  are 
open  to  students  in  the  School  of  Political  Science. 


Most  of  the  courses  consist  chiefly  of  lectures ;  a  smaller  number  take  the  form  of 
research  under  the  direction  of  a  professor.  In  each  subject  is  held  at  least  one  seminar 
for  the  training  of  candidates  for  the  higher  degrees.  The  degrees  of  A.M.  and 
Ph.D.  are  given  to  students  who  fulfil  the  requirements  prescribed  by  the  University 
Council.  (For  particulars,  see  Columbia  University  Bulletins  of  Information,  Faculty 
of  Political  Science.)  Any  person  not  a  candidate  for  a  degree  may  attend  any  of 
the  courses  at  any  time  by  payment  of  a  proportional  fee.  Three  or  four  University 
fellowships  of  #650  each,  the  Schift  fellowship  of  $600,  the  Curtis  fellowship 
of  36oo,  the  Garth  fellowship  in  Political  Economy  of  $650,  and  University 
scholarships  of  $  1 50  each  are  awarded  to  applicants  who  give  evidence  of  special 
fitness  to  pursue  advanced  studies.  Several  prizes  of  from  $50  to  #250  are  awarded. 
The  library  contains  over  400,000  volumes  and  students  have  access  to  other 
great  collections  in  the  city. 


Studies  in  History,  Economics  and  Public  Law 

Edited  by  the 

Faculty  of  Political  Science  of  Columbia  University 


VOLUME  I,  1891-2.    2nd.  Ed.,  1897.    396  pp.    Price,  $3.00. 

lo  Tlie  Divorce  Problem.    A  Study  in  Statistics. 

By  Walter  A.  Willcox,  Ph.D.    Price,  7s  cents. 

2.  The  History  of  Tariff"  Administration  in  the  United  States,  from 

Colonial  Times  to  the  McKinley  Administrative  Bill. 

By  John  Dean  Goss,  Ph  D.    Price,  $1.00. 

3.  History  of  Municipal  Laud  Ownership  on  Manhattan  Island. 

By  George  Ashton  Black,  Ph.D.    Price,  $1.00. 

4.  Financial  History  of  Massachusetts. 

By  Charles  H.  J.  Douglas,  Ph.D.    (Not  sold  separately.) 

VOLUME  II,  1892-93.    503  pp.    Price,  $3.00. 

1.  The  Economics  of  the  Russian  "Village. 

By  Isaac  A.  Hourwich,  Ph.D.    (Out  of  print.) 

2.  Bankruptcy.    A  Study  in  Comparative  Legislation. 

By  Samuel  W.  Dunscomb,  Jr.,  Ph.D.     Price,  $1.00. 

3.  Special  Assessments:  A  Study  in  Municipal  Finance. 

By  Victor  Rosrwatmr,  Ph.D.    Second  Edition,  1898.    Price,  £x.oo. 

VOLUME  III,  1893.    465  pp.    Price,  $3.00. 

1.  'History  of  Elections  in  the  American  Colonies. 

By  Cortland  F.  Bishop,  Ph.D.    Price,  $1.50. 

2 .  The  Commercial  Policy  of  England  toward  the  American  Colonies. 

By  George  L.  Beer,  A.M .     (Not  sold  separately?) 

VOLUME  IV,  1893-94.    438  pp.    Price,  $3.00. 

1.  Financial  History  of  "Virginia.  By  William  Z.  Ripley,  Ph.D.    Price,  f  i.oo. 

2. *The  Inheritance  Tax.       By  Max  West,  Ph.D.    Second  Edition,  1908.    Price,  $2.00. 

3.  History  of  Taxation  In  "Vermont. 

By  Frederick  A.  Wood,  Ph.D.    (Not  sold  separately.) 

VOLUME  V,  1895-96.    498  pp.    Price,  $3.00. 

1.  Double  Taxation  in  the  United  States. 

By  Francis  Walker,  Ph.D.     Price,  81.00. 

2.  The  Separation  of  Governmental  Powers. 

By  William  Bondy,  LL.B.,  Ph.D.    Price,  £1.00. 

3.  Municipal  Government  In  Michigan  and  Ohio. 

By  Delos  F.  Wilcox,  Ph.D.    Price,  $1.00. 

VOLUME  VI,  1896.    601  pp.    Price,  $4.00. 

History  of  Proprietary  Government  in  Pennsylvania. 

By  William  Robert  Shepherd,  Ph.D.    Price  $4.00;  bound,  J4.50. 

VOLUME  Vn,  1896.    512  pp.    Price,  $3.00. 

1.  History    of    the    Transition    from    Provincial    to   Commonwealth 

Government  In  Massachusetts. 

By  Harry  A.  Cushing,  Ph.D.    Price,  $2.00. 

2.  Speculation  on  the   Stock  and  Produce  Exchanges  of  the  United 

States.  By  Henry  Crosby  Emery,  Ph.D.    Price,  $1. 50. 


VOLUME  VIII,  1896-98.    551pp.    Price,  $3.50. 

1.  The  Struggle  between  President  Johnson  and  Congress  over  Re- 

construction. By  Charles  Ernest  Chadsey,  Ph.D.    Price,  $1.00. 

2.  Recent  Centralizing  Tendencies  in  State  Educational  Administra- 

tion. By  William  Clarence  Webster,  Ph.D.     Price,  75  cents. 

3.  The  Abolition  of  Privateering  and  the  Declaration  of  Paris. 

By  Francis  R.  Stark,  LL.B.,  Ph.D.     Price,  $1.00. 

4.  Public  Administration  in  Massachusetts.    The  Relation  of  Central 

to  Local  Activity.  By  Robert  Harvey  Whitten,  Ph.D.     Price,  $1.00. 

VOLUME  IX,  1897-98.    617  pp.    Price,  $3.50. 

1.  *English  Local  Government  of  To-day.     A  Study  of  the  Relations 

of  Central  and  Local  Government. 

By  Milo  Roy  Maltbie,  Ph.D.     Price,  $2.00, 

2.  German  Wage  Theories.    A  History  of  their  Development. 

By  James  W.  Crook,  Ph.D.     Price,  $1.00. 

3.  The  Centralization  of  Administration  in  New  York  State. 

By  John  Archibald  Fairlie,  Ph.D.     Price,  $1.00. 

VOLUME  X,  1898-99.    500  pp.    Price,  $3.00. 

1.  Sympathetic  Strikes  and  Sympathetic  Lockouts. 

By  Fred  S.  Hall,  Ph.D.    Price,  $1.00. 

3.  *Rhode  Island  and  the  Formation  of  the  Union. 

By  Frank  Greene  Bates,  Ph.D.     Price,  Si. 30. 

8.  Centralized  Administration  of  Liquor  Laws  In  the  American  Com- 
monwealths. By  Clement  Moore  Lacey  Sites,  Ph.D.    Price,  $1.00. 

VOLUME  XI,  1899.    495  pp.    Price,  $3.50. 

The  Growth  of  Cities.  By  Adna  Ferrin  Webbr,  Ph.D. 

VOLUME  XII,  1899-1900.    586  pp.    Price,  $3.50. 

1.  History  and  Functions  of  Central  Labor  Unions. 

By  William  Maxwell  Burke,  Ph.D.     Price,  (i.oo- 

2.  Colonial  Immigration  Laws. 

By  Edward  Embbrson  Proper,  A.M.    Price,  75  cents. 

3.  History  of  Military  Pension  Legislation  in  the  United  States. 

By  William  Henry  Glasson,  Ph.D      Price,  $1.00. 

4.  History  of  the  Theory  of  Sovereignty  since  Rousseau. 

By  Charles  E.  Merriam,  Jr.,  Ph.D.    Price,  f  1.50. 

VOLUME  Xm,  1901.    570  pp.    Price.  $3.50. 

1.  The  Legal  Property  Relations  of  Married  Parties. 

By  Isidor  Lobb,  Ph.D.    Price,  {1.50. 

2.  Political  Nativism.  in  New  York  State. 

By  Louis  Dow  Scisco,  Ph.D.    Price,$2.oo. 

3.  The  Reconstruction  of  Georgia. 

By  Edwin  C.  Woolley,  Ph.D.    Price.  $1.00. 

VOLUME  XIV,  1901-1902.    576  pp.    Price.  $3.50. 

1.  Loyalism  in  New  York  during  the  American  Revolution. 

By  Alexander  Clarence  Flick,  Ph.D.    Price,  $2.00. 

2.  The  Economic  Theory  of  Risk  and  Insurance. 

By  Allan  H.  Willett,  Ph.D.     Price,  $1.50. 

3.  The  Eastern  Question :  A  Study  in  Diplomacy. 

By  Stephen  P.  H.  Duggan,  Ph.D.     Price,  $1.50. 

VOLUME  XV,  1902.    427  pp.    Price,  $3.00. 

Crime  in  Its  Relations  to  Social  Progress. 

By  Arthur  Cleveland  Hall.  Ph.D. 


VOLUME  XVI,  1902-1903.    547  pp.    Price,  $3.00. 

1.  The  Past  and  Present  of  Commerce  in  Japan. 

By  Yetaro  Kinosita,  Ph.D.     Price,  51.50. 
8.  The  Employment  of  "Women  in  the  Clothing  Trade. 

By  Mabel  Hurd  Willet,  Ph.D.     Price,  $i-5°- 
3.  The  Centralization  of  Administration  in  Ohio. 

By  Samuel  P.  Orth,  Ph.D.     Price,  $1.50. 

VOLUME  XVII,  1903.    635  pp.    Price,  $3.50. 

1.  *CentraIizlng  Tendencies  in  the  Administration  of  Indiana. 

By  William  A.  Rawles,  Ph.D.    Price,  $2  50. 

2.  Principles  of  Justice  in  Taxation. 

By  Stephen  F.  Weston,  Ph.D.     Price,  $2.00. 

VOLUME  XVIII,    1903.    753  pp.    Price,  $4.00. 

1.  The  Administration  of  Iowa. 

By  Harold  Martin  Bowman,  Ph.D.  Price,  Si. so. 

2.  Turgot  and  the  Six  Edicts.  By  Robert  P.  Shepherd,  Ph.D.  Price,  51.50. 

3.  Hanover  and  Prussia,  1795-1803. 

By  Guy  Stanton  Ford,  Ph.D.  Price,  52.00. 

VOLUME  XIX,  1903-1905.    588  pp.    Price,  $3.50. 

1.  Josiah  Tucker,  Economist.  By  Walter  Ernest  Clark,  Ph.D.    Price,  51.50. 

2.  History  and  Criticism  of  the   Labor  Theory  of  Value  in  English 

Political  Economy.  By  Albert  C .  Whitaker,  Ph.D.    Price,  5i-5o. 

3.  Trade  Unions  and  the  Law  in  New  York. 

By  George  Gorham  Groat,  Ph.D.    Price,  51.00. 

VOLUME  XX,  1904.    514  pp.    Price,  $3.00. 

1.  The  Office  of  the  Justice  of  the  Peace  in  England. 

By  Charles  Austin  Beard,  Ph.D.    Price,  5T-50. 

2.  A  History  of  Military  Government  in  Newly  Acquired  Territory  of 

the  United  States.  By  David  Y.  Thomas,  Ph.D.    Price,  52-00. 

VOLUME  XXI,  1904.    746  pp.    Price.  $4.00. 

1.  'Treaties,  their  Making  and  Enforcement. 

By  Samuel  B.  Crandall,  Ph.D.    Price,  $i .50. 

2.  The  Sociology  of  a  New  York  City  Block. 

By  Thomas  Jesse  Jones,  Ph.D.    Price,  $1.00. 

3.  Pre-Malthusian  Doctrines  of  Population. 

By  Charles  E.  Stangbland,  Ph.D.     Price,  52-5°. 

VOLUME  XXII,  1905.    520  pp.    Price,  $3.00. 

The  Historical  Development  of  the  Poor  Law  of  Connecticut. 

By  Edward  W.  Capfn,  Ph.D. 

VOLUME  XXIII,  1905.    594  pp.    Price,  $3.50. 

1.  The  Economics  of  Land  Tenure  in  Georgia. 

By  Enoch  Marvin  Banks,  Ph.D.     Price,  51.00. 

2.  Mistake  in  Contract.    A  Study  In  Comparative  Jurisprudence. 

By  Edwin  C.  McKeag,  Ph.D.    Price,  51.00. 

3.  Combination  in  the  Mining  Industry. 

By  Henry  R.  Mussey,  Ph.D.    Price,  $1.00. 

4.  The  English  Craft  Gilds  and  the  Government. 

By  Stella  Kramer,  Ph.D.     Price,  f  1.00. 

VOLUME  XXIV,  1905.    521  pp.    Price,  $3.00. 

1.  The  Place  of  Magic  In  vhe  Intellectual  History  of  Europe. 

By  Lynn  Thorndike,  Ph.D.     Price,  75  cents. 

2.  The  Ecclesiastical  Edicts  of  the  Theodosian  Code. 

By  William  K.  Boyd,  Ph.D.     Price,  75  cents. 

3.  *The  International  Position  of  Japan  as  a  Great  Power. 

By  Seiji  G.  Hishida,  Ph.D.     Price,  52.00. 


VOLUME  XXV,  1906-07.    600  pp.    Price,  $4.00. 

1.  *  Municipal  Control  of  Public  Utilities. 

By  Oscar  Lewis  Pond,  Ph.D.     Price,  Ji.oo. 

2.  The  Budget  in  the  American  Commonwealths. 

By  Eugbne  E.  Agger,  Ph.D.     Price,  $i  50. 

3.  The  Finances  of  Cleveland.  By  Charles  C.  Williamson,  Ph.D.    Price,  $2.00. 

VOLUME  XXVI,  1907.    559  pp.    Price,  $3.50. 

1.  Trade  and  Currency  in  Early  Oregon. 

By  James  H.  Gilbert,  Ph.D.     Price,  Ji.oo, 

2.  Luther's  Table  Talk.  By  Preserved  Smith,  Ph.D.     Price,  $1.00. 

3.  The  Tobacco  Industry  in  the  United  States. 

By  Meyer  Jacobstkin,  Ph.D.     Price,  {1.50. 

4=.  Social  Democracy  and  Population. 

By  Alvan  A.  Tbnnev,  Ph.D.     Price,  75  cents. 

VOLUME  XXVII,  1907.    578  pp.    Price,  $3.50. 

1.  The  Economic  Policy  of  Robert  Walpole. 

By  Norris  A.  Brisco,  Ph.D.     Price,  J1.50. 

2.  The  United  States  Steel  Corporation. 

By  Abraham  Berglund,  Ph.D.     Price,  $1.50. 

3.  The  Taxation  of  Corporations  in  Massachusetts. 

By   Harry  G.  Friedman,  Ph.D.     Price,  $1.50. 

VOLUME  XXVIII,  1907.    564  pp.    Price,  $3.50. 

1.  DeWitt  Clinton  and  the  Origin  of  the  Spoils  System  In  New  York. 

By  Howard  Lee  McBain,  Ph.D.     Price,  $1.50. 

2.  The  Development  of  the  Legislature  of  Colonial  Virginia. 

By  Elmbk  I.  Miller,  Ph.D      Price,  $1.50. 

3.  The  Distribution  of  Ownership. 

By  Joseph  Harding  Underwood,  Ph.D.     Price,  f  x.50. 

VOLUME  XXIX,  1908. 

1.  Early  New  England  Towns. 

By  Annb  Bush  MacLiar.    (In  press.) 

2.  New  Hampshire  as  a  Royal  Province. 

By  William  H.  Fry.    {In press.) 

VOLUME  XXX,  1908. 

The  Province  of  New  Jersey,  1664—1738. 

By  Edwin  P.  Tanner.    (In  press.) 

VOLUME  XXXI,  1908. 

1.  Private  Cars  and  American  Railroads.  By  L.  D.  H.  Wild.    (In  press.) 

2.  The  Enforcement  of  the  Statutes  of  Laborers. 

By  Bertha  Haven  Putnam,  Ph.D.    (In  press.) 

VOLUME  IV,  No.  2,  1908. 

♦The  Inheritance  Tax. 

Completely  revised  and  enlarged.     By  Max  West,  Ph.D.     Price,  $3.00. 


The  price  for  each  volume  is  for  the  set  of  monographs  in  paper.  Each  volume, 
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The  set  of  twenty-eight  volumes,  comprising  seventy-seven   monographs, 

(except  that  Vol.  II  can  be  supplied  only  in  unbound  nos.  2  and  3) 

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be  supplied  only  in  connection  with  complete  sets. 


For  further  information,  apply  to 

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or  to  the  MACMILLAN  COMPANY,  New  York. 

London :  P.  5.  KING  &  SON,  Orchard  House,  Westminster. 


POLITICAL  SCIENCE  QUARTERLY 

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lows the  most  important  movements  of  foreign  politics,  but  devotes  chief 
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CONTENTS   OF  THE   LAST  TWO  NUMBERS. 
September,  1907. 

Trade  Unions  and  Trusts Henry  R.  Seager 

The  Workingmen's  Party  of  New  York  Frank  T.  Carlton 

Slave  Labor  in  the  Charleston  District  Ulrich  B.  Phillips 

Burgoyne's  Troops CHARLES  R.  LlNGLEY 

De  Facto  Office K.  Richard  Wallach 

The  Education  of  Voters George  H.  Haynes 

The  Ethics  of  Empire , Henry  Jones  Ford 

December,  1907. 

Railroad  Valuation Wm.  Z.  Ripley 

The  Legal  Status  of  Trade  Unions Henry  R.  Seager 

The  Constitutionality  of  Civil  Service  Laws Harold  Harper 

The  Office  of  Mayor  in  France Wm.  Bennett  Munro 

The  Roman  Gens G.  W.  Botsford 

Current  Political  Theory Wm.  A.  Dunning 

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